Monday, January 04, 2016

Happy New Year! Let's talk about REAL Investing!

Happy New Year folks, it's 2016. This year is meaningful in a way since this site started out in 2006. So, a decade just whizzed by with some intermittent writing, some charts and lots of thinking and oh yes, thanks for supporting this site for the past 10 years! It's been great so far, and there's another 40 more years to go! We are on track to at least match Berkshire or SG50, and it so happened that Berkshire is actually as old as Singapore and celebrated its 50th anniversary in 2015. So in 2056, we shall have 8PA50 or something. Do hang around! 

Today we would like to discuss some interesting notions about investing, and hopefully correct the layperson's perception of what real investing is all about. To most people, investing likely equates to making money in a money's game, which is linked to trades, making good speculation, being some hotshot trader, like those protrayed by Hollywood, especially in the film Wall Street starring Michael Douglas. In the Singapore's context, some might remember Da Shi Dai, or The Greed of Man, an epic Hong Kang drama series about stock manipulation that propelled a few young actors back then to stardom, like Liu Qing Yun and Vivian Chow.

DVD Cover for Da Shi Dai

Well real investing is nothing like what was portrayed in dramas, movies etc. But the images stuck. Today, when we think about investing, we probably linked it to all of the above: speculation, manipulation, big money game making the rich getting richer etc. Most would think it's a good way to get rich quick. Singaporeans, luckily or unluckily, get exposed relatively early, like in universities but soon learnt this game is really not that easy. Armed with some rudimentary knowledge, a desk and buying a PC for this purpose, we think we could make big bucks. Aspiring one day, our desks would look like those portrayed in the movies. Maybe like the one below:

A dream desk

A desk full of screens, with live prices and we become some hotshot investors sitting in plush chairs. That's the image for most people perhaps. They think that an investor's job would be to monitor markets day in day out, keeping updated with real time news, understanding price movements, making lots of trades, looking smart. Sorry, that's all just in our heads. None of these are close to any truths. A real investor's desk looks like the one below:

Warren Buffett's desk

For Warren Buffett, he doesn't even have a PC although most modern investors today do have a basic one, for news, excel and online trading. The truth is, an investor's job is really to read and to think. Hence the real desk would be filled with books, reports, newspapers, magazines more reports and more things to read. Then we have the all important thinking tools ever invented: the pencil and the paper. That's the truth. That's real investing. Okay today we need Excel to crunch some numbers, but when we do reach for Excel, the bulk of the mental work is over. Hence the real job is to read and to think. To think better that all the amateurs out there. In order to achieve that, it's also important to discuss. To challenge ourselves by talking to like-minded people, people who are smarter than us to point out our mistakes and of course people whom we love to hang out with. So read, think, discuss. If we have to surmise the real job of investing into three words. That's the three verbs.

What's so difficult then? If it's just the three verbs. Well, golf is also about swinging a stick to hit a ball, but it takes years to master right? Simple things may not be easy to accomplish. Take reading for example. Most adults today read some stuff, like the newspapers or books or magazines but to be a disciplined reader takes a different mindset and perhaps it's really a different skill set. In fact, most people would not be able to keep reading for hours on end. Personally, I find it hard to sit down and continuously read for more than an hour. And I don't recommend trying to be a four-hour bookworm to be a good investor. Maybe an hour or two per day would be enough, excluding newspaper reading. We have tons of other things to do still.

Thinking would perhaps be the hardest skill set, and it ties in with discussion. It would be easier to brainstorm with friends than to think alone. But it's not every day that we get to meet all our friends, so it might be useful to spend some time thinking everyday. That's perhaps the most important one to two hours we could ever spend. Again, it's not easy. Based on my personal experience, I usually squander these precious minutes randomly surfing the net. Before knowing it, the hour is up and I have to get back to real stuff, like laundry, or playing with the kids.

What about the portfolio? Or stock trades?

Well, the truth is, real investors don't spend too much time on these either. It's all thinking. When the time comes to enter the trade, it takes a few minutes. It cold be weeks of work done that led to the few minutes. It's just like pressing the final red button. With no drama. In fact, one value investor recommended never to put in a trade during market hours. Do it before and go to sleep. That's because the daily fluctuation of 2-5% shouldn't change the decision to buy a stock which could double or triple. The real time prices are just distractions.

As for portfolio reviews, the optimal frequency could be quarterly or longer but that's too far away for most people, so perhaps a monthly review would work but perhaps just reviewing a part of the portfolio. Long term stuff doesn't change weekly or monthly so it doesn't make sense to be doing reviews too soon. Say with a portfolio of 20-30 stocks, a monthly review on 2-3 stocks would work well. So we get back to the same stocks after 10 months. More on this on another post.

So putting it all together, a real investor could have a work plan as follows:

1. Read newspapers (at least 2: ST and FT)
2. Writing down relevant notes
3. Doing good in-depth reading

1. Read at least one magazine (the Economist)
2. Discussion with friends
3. Immerse in good long term strategic thinking

Monthly or Quarterly
1. Review parts of the portfolio (more thinking actually)
2. Consolidate relevant trades and key them in

So, that's the truth about investing. It's boring reading, thinking and occasional chats with other investors. Once in a while, we get to kick the tires, go for factory tours or AGMs but most of the time, it's desk bound and pretty lonely way to work. But if we keep going at it, someday, we get to be quite good. That's when things shine through. 

To show with a bit of a stretched analogy, we come back to one of the stars of Da Shi Dai or The Greed of Man, Ms Vivian Chow. Here's how she looked in 1990, some 25 years ago.

Vivian Chow, 1990

Most male bloggers should be drooling by now. She was the girl-next-door star in Asia back then. She couldn't sing and her acting skills were so-so but who cares? Her posters were all over army barracks and teenage boys' bedrooms. Then she got tired of show business and disappeared. Only to reappear a few years ago. Here's how she look today.

Vivian Chow, 2015

Man! She looked even better, right? So people asked, what's her secret of keeping herself so beautiful after so many years. Her answer was simple yet profound. Every day, she strives to be happy, maintain her health and smile. That's it. If we take the liberty to translate that into three relevant verbs, it might be: exercise, eat right and smile. Do enough, and we can conquer aging. Beauty is a mere reflection of our internal construct and accumulation of our daily thoughts and actions. We keep them positive, we are good.

So to be a good investor with a solid portfolio, would require, similarly, the correct internal construction: the right thinking and good ideas from daily reads, insights and also the good temperament to execute the trades free of greed and fear. The portfolio would then be the reflection of years of wisdom and compounded growth, filled with quality companies with exposure to various sectors, secular trends and themes. And it all starts with these three verbs: read, think, discuss.

A belated Happy New Year to all!

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