A few days ago, I went for a talk on “Path to Financial Freedom” by Dennis Ng. It was actually a free preview for his workshops but one could learn a thing or two from the preview. He has been featured in many local newspapers and TV shows and writes for MyPaper every alternate Wednesday. What connects him to the layman is that he was once a salaried employee like most Singaporeans and he became financially free after several years of saving and investing prudently.
Dennis Ng shared how he became a millionaire. He was earning an average of $6,000 per month for 15 years. He saved 20% of his salary per month and that works out to $14,400 per year. What he did with his savings over the years was that he invested in stocks and properties. He did not reveal things like what stocks he invests in, which year he started investing, if he lost huge amounts of money during his investments and if he has buffer cash to cushion him from loses and to cover his basic needs. From his preview, I could gleam that he looks at the financial statements of companies and invests in fundamentally strong companies ala Warren Buffett style. I think a major reason why Dennis became a millionaire was that he timed the market. When the stock market was getting exuberant, he exited from the market like in 2007. He entered again after the prices crashed. He uses technical analysis by looking at 100 days simple moving average and 200 days simple moving average crossovers.
He also is very prudent in his expenses. He shared his experience on how he curbs his expenses. When he was working, his fellow colleague always bought a $5 Spinelli coffee everyday whereas he made his own 3-in-1 coffee. To commute between places, he uses BMW (bus, MRT, walk).
Furthermore, he explained that not all debt is bad. There’s good debt and bad debt. Bad debt is car loan, credit card debt, among others. Good debt is your housing loan and investment property mortgage loan.
The preview reinforced my beliefs and the idea that becoming financially free is not difficult. One has to save a substantial amount every month consistently. Use part of the savings to invest prudently in stocks for the long-term. The other part can become your “safety net” or emergency fund to be used to cover your daily expenses when you lose your job. Your expenses should also be kept low and not be spent on unnecessary stuff. Also, the earlier you start investing, the faster you can start compounding your money since time is on your side.
I sold off my stakes in Super Group last week due to the following two reasons:
- Stock has become too overvalued according to my calculations
- Wanted to liquidate and keep some cash amid all the economic uncertainties
The main reason why I liquidated was to have some cash in hand to buy up companies when Mr. Market throws a huge tantrum. Super Group has been hovering in the ‘overvalued’ region for some time but I didn’t sell until recently. I would have not liquidated, if not for the opportunities that may be presented in the short-term due to any market corrections.
Let’s imagine you can predict the market with 101% accuracy. Let’s also imagine that you are the epitome of bravery and invested exactly at the lowest point of the stock market during the financial crisis recently. Even though Warren Buffett, Peter Lynch and Benjamin Graham combined cannot achieve such a wonderful feat, you have done so! Congrats! Would you like to see how such a portfolio will look like? Here you go:
I’ve put together a portfolio of 16 stocks that I like and feel have wide moat/good margins/good cash flow. I have not thoroughly analysed all of the stocks. The portfolio shows an ROI of 159.6% (as of 3rd June 2011) over around two years. If you were extremely greedy (Gordon Gekko’s “Greed is good” phrase rings true) and invested in the gloomiest of days in end 2008/early 2009 when the whole market was in trepidation, that would have been the ROI you would have achieved. However, we all know and agree that we cannot know when the exact bottom will be. What we can do is that we can invest around the bottom by using some simple technical analysis. We don’t have to be exact but a rough estimate of the bottom would suffice. If we had invested around the bottom, instead of getting ROI of 159.17% (this is the best case scenario), we would have achieved at least an ROI of 100%. That’s average of 50% per year returns over two years! This is the wonder of investing when Mr Market is throwing up a huge tantrum and when the whole world is in panic!
The aim of this post is to demonstrate why we need to invest in a downturn and be net buyers instead of net sellers. Many millionaires are made during a downturn. In a recent report few days ago, it was revealed that about 15.5% of the households in Singapore have more than US$1 million of investable assets in 2010, the highest proportion in the world. One of the person interviewed by Straits Times said most of his money was made during the financial crisis. I’m sure many millionaires in Singapore would attest to the same thing. So, during the next downturn, are you going to panic and sell or be extremely excited and load up on stocks? You decide!
Many who have been following the stock market closely since May would know about Artivision. They released a news on 15th May saying the company has made a Facebook application called Advision which is a revenue-sharing application that displays advertisement on videos and still photographs uploaded by users of Facebook. The share price has been volatile for some time and rose by a whooping 69.2% to close at 22 cents yesterday!
However, if we were to look at the fundamentals of the company, it’s nowhere near a company that value investors will invest in. Take a close look at the following:
From the above, it can be seen that Artivision had net losses, dwindling shareholders’ equity, negative cashflow, dwindling cash balances, negative margins, negative ROE and ROA for the past three years. The share price has been going up like crazy based on pure speculation and not due to the fundamentals of the company.
We should all remember that behind every stock price, there’s an underlying business. If the underlying business is not sound, one should stay away from the business. Buying such businesses will only cause an emotional roller-coaster (based on fear and greed). Unless you have lots of money to spare and can stomach huge risks, you should stick to investing in fundamentally strong companies with good free cash flow. Such prudent investing will ensure that you can have a good night’s sleep and can also pave way for a worry-free retirement.
Value investing is boring! I can hear some of you shouting “HELL YEAH!”. It’s boring because sometimes we need to wait for eons before our investment reaches the intrinsic value. It’s boring because we don’t get instant gratification and prices take a long time to move (I know you are thinking about Kingsmen!). It’s boring because we need to sit still and have to control those itchy hands of ours.
Value investors need to have lots of patience and discipline (and I really means LOTS). When we buy into a stock, we should not expect to make money immediately. In fact, we must be mentally prepared to lose paper money in the short-term. It most probably will take a long time for the stock to rise up to the intrinsic value. In the meantime, we need to sit still like good boys and girls and not meddle with our portfolio. The trader in us always wants to do something like sell off when there’s a small profit and cut loss unnecessarily, thinking we can buy back later. We have to control the urge to do that and remember that we are in this for the long-term. If the business fundamentals are intact, we should just sit on the sidelines and not do anything. When the price dips and goes down tremendously, we must have the discipline to not hit the sell button out of panic (provided the business is still flourishing).
Currently, some stocks in my portfolio are down and my China ETF is down 10% as of today due to the negative market. I’m willing to hold on to them as I believe they are undervalued and have lots of room for capital appreciation. I do feel emotional at times when my stocks are down but I need to keep on reminding myself that I’m in this value investing business for the long-term and am not here for short-term gains. Having more patience and discipline is what I need to work on and am working on it constantly. For the short-term, the prices fluctuate up and down but value is what I get for the long-term. Value investing is not easy due to the strict discipline and patience we need to have. This might explain why not many are into value investing. Having said that, those who have control over their emotions will see tremendous benefit for the long-term and I believe in this. Many have been there, done that. People like Benjamin Graham, Warren Buffett and Peter Lynch are/were great value investors due to their emotional control and they have shown us that it can be done with the right skills and attitude.
Actually, contrary to the title, value investing is not boring and I need to confess my love for value investing. I feel value investing is one of the best ways to accumulate wealth. All that is needed is just a bit more of mental fortitude so that we don’t succumb to unwarranted actions that will affect our portfolio.