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6 Useful Reminders From Benjamin Graham

I have been reading Intelligent Investor by Benjamin Graham, as many of you have as well. Very often when we read something, we forget them if we do not take down notes. I found these 6 Principles from Benjamin Graham extremely applicable and timeless, thus the sharing!

1) Not just a ticker symbol

“A stock is not just a ticker symbol, it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”

Especially for traders, this would serve as a good reminder that it’s not just a symbol (eg. APPL, BABA, GOOG). Every listing on the stock exchange is a business and it has an underlying value to it. (Balance Sheet, Income Statements, etc.) I used to be an active trader and I too fell prey to this point. It didn’t matter to me what company it was, because my mindset was to grab my profits and run. What happens if your Technical Analysis was wrong and you lose instead of profiting then? While it works for some, it’s definitely not the best way to start out your investment journey because more often than not, you lose from capital loss and commissions unless you have a trade plan in place, and deep pockets for learning.

2) The market is a pendulum

“The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The Intelligent Investor is a realist who sells to optimists and buys from pessimists.”

Mr. Market will present to you the same stock at different prices. It’s up to you to selectively pick at what price you want to buy it at. If you knew the value of the stock was around $5, would you pay $10 for it or $1 for it? The price you buy it at typically reflects the amount of patience you have. You’ll never know how low a stock can go or how high it can get but if there’s something you can be somewhat certain. The fair value of the company. Use it to your advantage, as a benchmark to compare against the price you are paying! Is it justifiable?

3) Price is what you pay, value is what you get

“The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.”

If you decide to sell a stock at $10 no matter what price you buy it at, your entry price will determine your return. If you bought at $1, your returns would be 1000%. If you bought it at $5, your returns will be 100%. Mr. Market doesn’t care at what price you buy his stocks, so buy it cheaply! Buy it below the true worth, and he still doesn’t even care! So don’t feel bad to buy a stock at a huge discount!

4) The one risk you can’t eliminate

“No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong.”

Even the greatest investor himself, Warren Buffett, made mistakes. What makes you think you won’t? If you can’t eliminate the risk, mitigate it! Only by insisting on ‘margin of safety’, no matter how exciting an investment may be, can you reduce the damage of your error. Say you bought a stock at $0.60 thinking it was worth $1, but in fact it’s only worth $0.80 (40% margin of safety in this case). Even if you were wrong, when it goes to $0.80 you’ll still profit. Assume you bought at $1, and market decides to be perfectly efficient at it’s pricing, reflecting it’s true value of $0.80, you’ll be facing with a 20% loss.

5) Be a critical thinker

“Become a critical thinker who takes no Wall Street ‘facts’ by faith, and invest with patient confidence, you can take steady advantage of even the worst bear markets.”

The secret to your financial success is inside yourself. Don’t simply accept what is presented to you, spend the time to dig into the figures, to test the ‘facts’. Don’t be too gullible and take everything with a pinch of salt! Engage in your own study despite being bombarded with ‘facts’ or hot tips.

6) See what others can’t

“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”

While it seems easy to foresee which industry will grow the fastest, that foresight has no real value if most of the other investors are already expecting the same thing! The growth would have been priced in before the news is out! Therefore, it’s not simply choosing a growing industry. Can you see it before the majority sees it? (Think contrarian) It’s usually easier to find these industries when you approach the industries with a contrarian thinking, loving an industry that everyone seems to dislike. With patience, it could pay off handsomely because of the sell off!

How does your behaviour sharpen your stock investment skills?

Investment books often urge readers to do extensive research to identify megatrends such as social and cultural shifts that could make a potentially big difference in investing decisions. However, the real answer is never simple. The ideal way to value anything, including company shares, would be to plug yourself entirely into the real world, which means shaping your daily behaviours such that it enables you to maximise your exposure and learning about almost everything.

Given the increasing connectedness of the world and the rapid explosion of information, learning is no longer confined to any one medium or source. Therefore, keeping an open heart and mind is in reality the best bet to a lucid understanding of the dynamic and complex interactions across companies, industries and countries.

The flowchart below illustrates the types of personal behaviours that may help individuals to hone their stock investment skills.

Click to enlarge:

How to Allocate your Portfolio

(This article is brought to you by Some Ideas on Investing in Singapore)

I’m going to share some of the ways that you can allocate your portfolio according to the different amounts of money that you are able to invest (those above your emergency fund and not needed for any big-ticket purchases).

Straits Times has done a similar article on this topic, How to invest if you have $20k or more (19 Jul), but I disagree with some of their recommendations (especially since I don’t really like the idea of unit trusts and prefer index funds)

If you have around:

$10,000 (or less) to invest….

100% Index funds or ETFs

You can place your money in index funds or an exchange-traded funds (ETFs), the latter can be bought and sold on the SGX like shares, but some of the funds are specified Special Investing Products (SIPs) and would require you to meet some criteria. This would give you diversification as investing in the fund will give you exposure to the different shares in the fund.

For example, investing in an index fund that tracks the Straits Times Index (STI) will spread your capital across the 30 shares that make up the STI, according to the size of the market cap of each company as the STI is a capitalization-weighted index.

$50,000 to invest….

60% Index funds or ETFs 40% Stocks or REITs

Instead of investing in index funds or ETFs, if you are more adventurous, you can try investing in individual companies or REITs (but I think it’s still good to keep a good part of your portfolio in index funds or ETFs). Picking out individual companies will require a bit more time to research the companies on your own to pick out the good from the rest. The ability to pick out good companies will require some experience to master, but the potential returns will be much better than investing in index funds or ETFs if done well, but don’t try to do so if you’re not willing to put in time to learn and research as you may end up only paying “tuition fees”.

$100,000 (or more) to invest….

70% Stocks or REITs 20% Bonds 10% Cash

With this amount, you may be able to purchase all of the 30 shares in the STI on your own to avoid the expense ratios of index funds and ETFs and another advantage would be getting dividends as the companies pay them instead of waiting for the funds to pay them out. You may still incur some minimum brokerage charges if you try this, but if held over a long enough period, this would be cheaper than using index funds or ETFs.

Another advantage of not using index funds and ETFs at this point is the ability to buy shares that you think may outperform the market. Let’s say you think that the finance sector may not do so well in Singapore, you can cut out the finance stocks, such as DBS, UOB and OCBC, and go for the companies that you think will outperform the market.

You may also want to keep some of your portfolio in bonds and cash as well to better protect your portfolio should the market enter a downturn, you still have an income and cash to take advantage of the drop in share prices to buy into the market at the cheaper prices.

I think that this is a good way to invest if you have above $100,000, unless you have amounts in the millions in which case I have not much idea of how to invest in that region.

Summary

Overall I support index funds and ETFs as a good way for people with smaller portfolios to be able to access a wide diversification across different shares in the index that the fund covers. (You can see my post on indexing at: Thoughts on Indexing) As your portfolio grows, you may want to move into individual shares as they offer the potential for better returns and with your larger investment, it would make more sense to spend more time researching the companies (amount earned over time is higher).

When investing in the market, you may also want to practice dollar-cost averaging to ensure that you do not enter the market at too high a price and get your fingers burnt when the market drops, but don’t invest too small amounts such that you spend a large amount of your money on minimum brokerage fees. While it’s good to diversify to reduce your exposure to any one company, investing in too many companies dilutes the returns of the “winners” that you have chosen.

Free Investment Resources Singaporeans Can Benefit From

1. BORROW BOOKS FROM THE PUBLIC LIBRARIES

The best way to fish in an unfamiliar territory is to research about it first. Know the basics in investing and trading by visiting your local or regional public library and borrowing their books. A few examples of the books you may find are “The Resilient Investor”, “Trading Options for Dummies”, and “7 Simple Strategies of Highly Effective Traders”.

The National Library Board (NLB) ensures that the information given in the public libraries are trusted, accessible, and comprehensive. Their genuine aim is to build a knowledgeable nation with generations of readers.

What is great about NLB’s website is that you can browse the availability of the book as well as find the list of libraries where it is located. This way, you do not have to go to a nearby library only to find out that what you are looking for is not there. For instance, you can find the 7 Simple Strategies of Highly Effective Traders book in 12 public libraries including Toa Payoh Public Library – our nearby library. Start searching by yourself, here.

2. ATTEND A NO-COST WORKSHOP ABOUT INCOME INVESTING

Last Tuesday, I had an opportunity to attend a workshop named: “Get Rich Slowly, The Income Investing Way”. Terence Tan led it. Terence Tan is the creator of the first Income Investing Programme in Asia-Pacific called Income Mastery Programme (IMP). Also, he is the chief investment strategist in Giants Learning Technologies as well as the founder of First Traders Network.

With a guy whose experience in stocks spans over 16 years, I thought to myself that I could certainly learn a thing or two. To get things straightened out, if you are looking for a method to get rich quickly through investing, this talk is not for you. Instead, this is for people who seek financial freedom by patiently and diligently pouring their resources for years on end.

Image Credits: facebook.com/IncomeMasteryProgramme

What you can expect from this free 2-hour workshop is to gain a glimpse of the mindsets of some investors such as the renowned Warren Edward Buffett, to uncover the principles of income investing, and to determine the right stocks in 15 minutes or less. Furthermore, he will introduce you to his own methodology called the Income Mastery Programme. My impression of IMP after the workshop was it was a feasible yet gradual way to generate profits while in the midst of low-risk trades. By lowering down the risk, you will be confident that the stocks make money over time. If you are interested to know more, you can register for their upcoming talk on August 18, here.

3. TAKE PART IN A HUGE INVESTMENT FAIR – FOR FREE

Dating back from 2007, Invest Fair Singapore is ShareInvestor’s annual event for investors and traders alike. Enjoy the presence of world-class speakers, key stakeholders, and other experts in the financial industry by registering here.

The list of featured speakers include Marc Faber (Investment Expert and Best-Selling Author), Kathy Lien (World-renowned Currency Strategist and Best-Selling Author), Roger Monthomery (Chairman and CIO of Montgomery Investment Management), and one of Forbes’ 2014 list of Singapore’s 50 Richest men – John Lim.

The seminars start with “Simple Trading Strategies for Fast Profits” on August 15 and ends with “Portfolio Allocation” on August 16. Best of all? You can get exclusive promotions from their exhibitors and stand a chance to win prizes at their lucky draw.

Image Credits: facebook.com/ShareInvestorSG

World Value Invest Fest 2015 Power Lessons [David Kuo]

Previously we explored into the mind of Warren Buffett through Mary Buffett’s invaluable lessons on Mr Buffett’s Value Investment Methodology and some of the power pointers on how to select a company to invest in. This time, let’s draw from David Kuo’s experience on Managing Risks In Stock Investing!

What is ‘Risk’?

A term we hear too often, yet never really having a perfect definition of what risk is. There are so many types of risks out there and how do we effectively manage all of them at once? Almost impossible! At best, we can mitigate them, but probably not completely eliminate them. But what good is identifying all the various types of risks affecting you, when you fail to know yourself? Risk profiling. If we don’t even know what is our risk profile, how can we select investments that have risk profile that is aligned to our own? Is it important for them to be aligned? Definitely! Say a 65-year old man who wants to invest his retirement fund for income, would you recommend him to buy speculative stocks with P/Es in the hundreds and no fundamentals? Of course not! Similarly, have we overlooked the risk of not a comprehensive risk profiling of ourselves and check if our investment decisions are aligned?

Different Strands of Investing for Different People!

There are so many different strands of investing:

Growth
Income
Blue Sky (Start-ups)
Sideways
GARP (Growth At Reasonable Price)
Bottom-Up
Top-Down
Value
Index Trackers

You don’t have to be afraid that you won’t find one that doesn’t suit you! First you need to identify where you are in life, what your investment goals are, and how much risks are you willing to take on to achieve your investment goals. Different strands of investing entails different risks and requires different investment mindset and strategies. Identify the strand that you want to focus in, read up on the skills and mindset required for the different strategies. For example, Index Trackers would adopt a very different mindset require a different skill set from Value or Growth investing. Index Trackers take on a more passive approach towards investing while gladly accepting the diversification it provides. Growth and Value Investing however requires the ability to not just read financial statements, but also, understand business as a whole and consider it from the point-of-view of a businessman. Both method works, but it depends on your investment goals. Are you trying to get from rags-to-riches? Or do you want to simply take a back seat and enjoy the ride? There’s no right or wrong, but it’s worth exploring and knowing yourself a little more.

How To Avoid Panicking

David Kuo shared this very powerful quote which many of us tend to forget – “Do not confuse the price of the stock with the story behind the stock.”

Indeed, does the price of the stock dictate the story behind the stock, or is it the other way around? If you only knew the price of the stock and not the story behind the stock, you would definitely panic because you have nothing to fall back on! David emphasises on the importance of knowing why you bought your stocks in the first place. If you knew the story behind the stock, would a falling price cause you to panic or would you see it as an opportunity to buy more at a cheaper price? If you knew the story, you would at least have the mental and emotional capacity to ride out the rough patch, having quiet confidence that the company’s results will show for itself in the long-run. “There will be delays in our investing journey”, so ALWAYS have a margin of safety! If we can’t eliminate, at least mitigate the temporary losses! Lastly, ask yourself, do you have the courage to invest when times are bad? 🙂

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