Ok so much so for institutional portfolio managers. On average, they are crap. Once in a while, you find stars like Peter Lynch, Seth Klarman and Warren Buffett. But these exceptional people are far and few in between.
The interesting story about Seth Klarman is always about this book that he had written like ages ago, called “Margin of Safety”. It talks about value investing and it didn’t sell well at all. So it went out of print. But recently, some Wall Street people started to bid for it on Ebay and it was sold for US$1,000!
Well, I got a free internet copy and am reading it. Cost me like S$10 to get it printed and binded.
Anyways, today we talk a little about portfolio management for the retail investors. How can a retail guy like you and me try to do some portfolio management?
Well, first, we must have like a couple of tens of thousands to start with. If you only have $10k. Then you can basically only buy 1 or 2 stocks. There is not much portfolio management to talk about. Just buy the blue chips or maybe buy an ETF and wait for it to grow to like $50k.
The reason why $10k can only buy 1-2 stock is bcos if you divide $10k up buy 10 stocks, you will be paying $40-60 of transaction cost for each stock, which makes the cost 4-6% for each stock and this will eat too much into your return per stock (which is like 8-10%pa).
So for those who do have $50-100k, then you might want to think a bit about which 5-10 stocks you want to buy. Here are some guidelines... Well actually it’s the same guideline, which is to diversify across everything. You definitely don’t want 5 stocks all in airlines or airline related industries.
1. Diversify across industries
So first we think across industries. If you are a conservative guy like me, you may want to allocate like 50% or more of your money to defensive industries like staples, food, utilities, telcos etc. Of course there are some megatrends happening in our lifetime, so maybe put some into resources, China related, or even tech. But you must definitely understand the risks here.
2. Dividends
This is one big criteria for me. I would want to put 70-80% of the stocks into good dividend stocks. Stocks with rising dividend over time, these are the best. Actually, these stocks will usually come from staples or food. So there is no contradiction bet 1 and 2.
3. Geographical exposure
China and Asia are the darlings of the stock market for the next 10-20 yrs. It makes sense to put money with exposure to these regions. This also means that you should look for Singapore co.s with such exposure. I would put maybe 30-50% in Asia, but also provided I can find cheap and good stocks. This might be the hardest thing to do today.
4. Asset Classes
For those who need more security, you can definitely consider 10-20% of the portfolio into bonds. However, since bonds usually pay 4-5% interest only, which you can get with some stocks in Singapore. It really doesn’t make too much sense to buy them, unless you can buy them like 80c to the dollar or something.
5. Structure
So just to round things up, if you can have a 10-12 stock/bond portfolio, it may look like this:
5-6 stocks in staples/food/telco, which includes 3-4 dividend stocks
2 Asia stocks/ETFs
2 Resource/Energy stock
1-2 bonds
One last note, unless you are really good at market timing, it pays to avoid value destroying industries like most of the tech industry, airlines, container shipping, oil refining etc and industries in secular decline like newsprint, general textile etc.
Hope this helps!
The interesting story about Seth Klarman is always about this book that he had written like ages ago, called “Margin of Safety”. It talks about value investing and it didn’t sell well at all. So it went out of print. But recently, some Wall Street people started to bid for it on Ebay and it was sold for US$1,000!
Well, I got a free internet copy and am reading it. Cost me like S$10 to get it printed and binded.
Anyways, today we talk a little about portfolio management for the retail investors. How can a retail guy like you and me try to do some portfolio management?
Well, first, we must have like a couple of tens of thousands to start with. If you only have $10k. Then you can basically only buy 1 or 2 stocks. There is not much portfolio management to talk about. Just buy the blue chips or maybe buy an ETF and wait for it to grow to like $50k.
The reason why $10k can only buy 1-2 stock is bcos if you divide $10k up buy 10 stocks, you will be paying $40-60 of transaction cost for each stock, which makes the cost 4-6% for each stock and this will eat too much into your return per stock (which is like 8-10%pa).
So for those who do have $50-100k, then you might want to think a bit about which 5-10 stocks you want to buy. Here are some guidelines... Well actually it’s the same guideline, which is to diversify across everything. You definitely don’t want 5 stocks all in airlines or airline related industries.
1. Diversify across industries
So first we think across industries. If you are a conservative guy like me, you may want to allocate like 50% or more of your money to defensive industries like staples, food, utilities, telcos etc. Of course there are some megatrends happening in our lifetime, so maybe put some into resources, China related, or even tech. But you must definitely understand the risks here.
2. Dividends
This is one big criteria for me. I would want to put 70-80% of the stocks into good dividend stocks. Stocks with rising dividend over time, these are the best. Actually, these stocks will usually come from staples or food. So there is no contradiction bet 1 and 2.
3. Geographical exposure
China and Asia are the darlings of the stock market for the next 10-20 yrs. It makes sense to put money with exposure to these regions. This also means that you should look for Singapore co.s with such exposure. I would put maybe 30-50% in Asia, but also provided I can find cheap and good stocks. This might be the hardest thing to do today.
4. Asset Classes
For those who need more security, you can definitely consider 10-20% of the portfolio into bonds. However, since bonds usually pay 4-5% interest only, which you can get with some stocks in Singapore. It really doesn’t make too much sense to buy them, unless you can buy them like 80c to the dollar or something.
5. Structure
So just to round things up, if you can have a 10-12 stock/bond portfolio, it may look like this:
5-6 stocks in staples/food/telco, which includes 3-4 dividend stocks
2 Asia stocks/ETFs
2 Resource/Energy stock
1-2 bonds
One last note, unless you are really good at market timing, it pays to avoid value destroying industries like most of the tech industry, airlines, container shipping, oil refining etc and industries in secular decline like newsprint, general textile etc.
Hope this helps!
Hi
ReplyDeleteI've tried to cut down on the number of stocks I hold to about half a dozen because it takes too much time to research and read about the developments of each of the companies.
Sometimes, I feel diversification is over-rated. Peter Lynch once referred to it as "di-worsification".
Hi PZ,
ReplyDeleteThanks for dropping by.
6 stocks or so is a good start, maybe 3 or 4 dividend/defensive stocks, 1 or 2 chiong stocks? :).
I too believe over-diversifying doesn't add value. I do also believe it doesn't make sense to put everything into just one bet.
Unless you are 120% sure it will work. But in life, nothing is ever 120%.
I wrote a post some time back about di-worsification too. It's under Label of "Modern Portfolio Theory".
Cheers!
Hi,
ReplyDeleteWell written article for the retail investors to manage their own diversified portfolio.
So what is your suggested stocks in this portfolio?
Why not start with a hypothetical account with $100k now and see how many % return pa you can get.
Open for all to discuss, then your readers will learn and do it themselves instead of losing money with Unit Trusts paying high fees to the Fund Managers even when they lose money.
It really depends on what stock we can find out. As market up and down, it's boring to trace it all the time. So GREAT company with fair price is my learnt from Buffett.
ReplyDelete