My Investment Journey

2008-11-07T20:56:00.003+08:00

Thoughts:

This current financial crisis has taught me one thing- the importance of cash at hand. When stock markets are at an all time high and everyone is overly optimistic, do not buy. Bear markets come and bull markets will soon take over.
Buy in bear markets, do nothing in bull markets unless there is something that is unresistable.
With inflation relatively stable between 6-9%, I seek to outperform the stock market by 10% yearly.
Income shall be divided as such: 3 months (3 x $500 = $1500) cash at hand, 20% of remainder to go into discretionary cash and remaining 80% goes into creation of portfolio.

Inadequacies

2008-06-03T18:26:00.004+08:00

Buffett says that one should approach the stock market as if he had a lifetime punch card. Everytime one buys a stock, he punches a hole. When the card has 20 holes, he is done- no more investing for life. That way, one filters out every idea but the best.

While reading books on Buffett in a bid to model my train of thoughts on the great mind, it struck me that many of the things that Buffett disagrees on- the Efficient Market Theory, Sharpe's model, beta are all taught in finance schools. Heck, I studied all these models in Financial Management classes, thinking that they were useful. I have little doubt that Buffett's preaching of value investing- that is, buying an undervalued stock and holding it forever is the model to follow. After all, why follow theories that thousands of other financial experts follow and not make much when one can follow a person who made it to Forbes' World's richest people through investing? Still it bugs me that what I study is in direct conflict with what I need in real life.

That aside, there are many aspects that I need to look into before I am ready to take the plunge. Other than raising sufficient capital, I would need to apply Buffett's 12 tenets to all the publicly listed companies in the Singapore General Exchange. More things that I need to follow up on:

Macroeconomics- knowing how interest rates, inflation, tax rates affect the economy
Statistics- decision trees to chart out probabilities
Tax rates on dividends and returns in the various countries
Knowing about the industries that the companies operate in

My S$21, 009.31 mistake

2008-05-24T19:07:00.008+08:00

It is rather inauspicious to start this new blog with my biggest investment mistake to date. Sometime in March last year, I heard about NTUC CO-OP IDEAL plans, which was like a mutual fund. Unlike mutual funds however, the charges were a princely 45% per annum for the 1st 3 years and no more charges for the rest of the time you hold the fund. The longer you hold the funds, the lower the charges you pay for a portfolio that is actively managed in theory. These plans make use of dollar cost averaging (you put aside a small sum every month and purchase stocks. When the market is booming, you buy less shares; when the market is down, you get to buy more shares) and the plus points about this IDEAL plans is that you can choose to take a "break" of premium paying for a period of 6 months (of course, the charges still continue) and that like a saving bank, you could withdraw money from the plans. Since I took up 2 IDEAL plans, $250 in the growth IDEAL plan (70% Singapore Equity 30% bonds) and $250 in 100% Singapore Equity, my total charge for my "mutual fund" offered by the NTUC was $8100 ($500 x 12 x 3 x 0.45).

Why did I classify this was a $8100 mistake? A few reasons really.

Firstly, in March when I was still working, I thought that I would be able to support my $500 monthly premium through giving of tuition. In the end, when I entered university, I realised that boosting my resume by taking up positions in my hall's EXCO had more value in the long run and the montly premium became a burden.

Secondly, the timing was bad. When I was purchasing shares with the dollar cost averaging method, the economy was doing very well and hence I would have been better off holding on to my money and investing it when the recession that has been forecasted hit.

Thirdly, the money was stuck in the IDEAL plans. Withdrawing the money would mean that the charges is an astronomical figure. It would take a grand total of 17 months before my money can pay off the $8100 and start to work for me.

Lastly, for all the mutual fund management here, it turned out that some 86.7% of the holdings was the STI index stocks. When I first purchased the 2 IDEAL plans, I was given the impression that it would be investing in blue chip Singapore equities. Instead, the simplest way for these fund managers would just put the funds in the STI index shares and it would track the STI by itself. For all the charges that I ended up paying, I could have achieved almost the same results if I had purchased the index stocks myself. Imagine the number of shares that the $8100 could have bought and $8100 compounded at a rate of 10% over 10 years would get me $21, 009.31.

Lessons learnt:

Inactivity is sometimes the best. I must learn to control the emotional part if I am to succeed in investing. Thankfully this lesson only cost me $21, 009.31. I need to remember that preservation of capital is the most important aspect of investing. There are only 2 rules to investing: Rule number 1- Don't lose money. Rule number 2- Don't forget the 1st rule.