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In his book Open Heart, Open Mind, the Tibetan Buddisht educator Tsoknyi Rinpoche recounted a conversation he had with his late father, Tulku Urgyen Rinpoche. 

The younger Rinpoche was about to visit the US for the first time to deliver teachings on Buddhism. He wanted advice from his father on how he should approach educating a new audience. Tulku Urgyen Rinpoche responded:

“Don’t let the praise go to your head. People will compliment you. They’ll say how great you are, how wonderful your teachings are… Whatever compliments your students give you have nothing to do with you… How you teach is not important. What you teach is.” 

The elder Rinpoche also said that he had observed many Buddhist teachers develop a mistaken notion – that they are special because their ways of imparting Buddhist lessons are popular with students. Tulku Urgyen Rinpoche gently reminded his son: “What’s really special, is the teaching itself.”

The investing analogy

If we invest soundly in the stock market with a long-term, business-focused mindset, it’s likelier than not that investing success will knock on our doors. When we taste success, it’s easy for ego to enter the picture. We may look into the mirror often and proclaim, “I’m a special investor!” 

But the entrance of ego plants the seeds of failure. My friend, the fund manager Goh Tee Leng, recently wrote in his website Investing Nook that Pride, or Ego, is one of the seven sins of investing. 

If we have done well in investing using the underlying framework that stocks represent a piece of a business and that the value of the stock is a reflection of the value of the underlying business, we’re not special. This framework was already fleshed out thoroughly by Benjamin Graham 85 years ago in his 1934 book, the first edition of Security Analysis. We may each have our own unique interpretations and applications of Graham’s then-groundbreaking ideas. But what’s really special, is the framework itself.

Conclusion

Preventing ego from getting into our heads is of utmost importance. Without ego, we can invest in a safer manner. That’s because we won’t fall prey to overconfidence. When overconfident, we think we know more than we actually do, and we may end up doing risky things, such as borrowing to invest or overly concentrating our portfolios.

This post will serve as a constant reminder to myself, a barrier that keeps my ego at the door. I hope it can serve the same purpose for you too.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Are we really able to do good while investing?

This question irked me at the time I was thinking of making a career switch to investing. I wanted a career that was both fulfilling and enabled me to make a difference to the world at the same time.

Thankfully, through further reading, I can say the answer to that question is an emphatic yes.

As investors, we are a small cog in the financial markets that help make the world a better place. 

Every drop counts

So how do we do good when we invest?  Well, let’s start at the very beginning. 

When a start-up that is looking to improve the world develops an idea, it needs funding. Venture capitalists help to fund these ideas.

In turn, these venture capitalists invest because they know that there is a stable public market system behind them.

Along the way, these startups enrich the lives of numerous stakeholders, including employees, customers, and shareholders.

At its initial public offering, the company then raises more funds through a public offering of shares.

Those who invest in initial public offerings do so because of the assurances of the liquidity of the public market and the ability to sell shares at a future date, which is when we (stock market investors, or public market investors) usually come in.

The final piece of the jigsaw

All of which means that we, public market investors, are a small but important piece of the jigsaw that helps drive innovation and the improvement of society through capitalism.

As you can see, by participating in the stock market as investors, we are indirectly part of the reason why startups are able to raise much-needed funds in the first place.

Impact investing

Besides simply being part of the financial markets, we can also choose to invest in companies that are actively improving the world.

One way is to invest in companies that are building a better future for tomorrow through innovative technologies such as Google. We can also invest in companies that uphold a high standard of corporate social responsibility by giving back to society or through actions that help reverse climate change.

The more investors embrace Impact investing, the more firms are likely to embrace the need for a strong corporate social responsibility to enrich the lives of other stakeholders and the world.

Recently, the Singapore government set aside US$2 billion in funds to participate in public market investment strategies that have a strong green focus. Singapore Education Minister, Ong Ye Kuang, described how investments help to shape the world saying, “Finance fuels the economy and business. It determines investment decision and it drives action.”

Enriching others

As you can see, investing is certainly not a zero-sum game. The injection of much-needed capital into companies that are improving the world aids numerous stakeholders along the way.

Even if we solely invest in the secondary market (the public stock market), we are still an important – albeit small – part of the financial markets that is essential in capitalism and the betterment of the world.

Further, by focusing our investing efforts on responsible companies that are not solely profit-driven but have a strong corporate social responsibility to do good, we can mold the way investment decisions are made and help to prod business towards socially responsible investment decisions.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Surprise! The best investing speech I’ve ever come across is not from Warren Buffett or other well-known investing legends such as Peter Lynch, Benjamin Graham, or John Neff. It’s from the little-known Dean Williams. 

The speech, Trying Too Hard, was delivered 38 years ago in 1981, when Williams was with Batterymarch Financial Management. But its content remains as relevant as ever. Here are five gems I took away from Williams’ timeless speech.

1.  Confidence and accuracy

“Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.”

Keep this in mind the next time you come across a market forecaster who is highly confident just because he’s backed by mountains of data. Bad data, however much the amount, can lead to bad forecasts. A poor understanding of how markets work (such as assuming that price movements in the financial markets follow a normal distribution) will also lead to toxic outcomes even when there’s plenty of data involved.

In fact, research by Philip Tetlock, a psychologist at Berkeley, brings this Dean Williams quote one step further by suggesting that confidence and accuracy in a forecast can often be inversely correlated.

2. Don’t just do something, stand there!

“The title Marshall mentioned, “Trying Too Hard”, comes from something that happened to me a few years ago. I had just completed what I thought was some fancy footwork involving buying and selling a long list of stocks. The oldest member of Morgan’s trust committee looked down the list and said, “Do you think you might be trying too hard?” At the time I thought, “Who ever heard of trying too hard?” Well, over the years I have changed my mind about that.”

Finance professors Brad Barber and Terry Odean published a paper in 2000 that looked at the trading records of more than 66,000 US households over a five-year period from 1991 to 1996. The research was astonishing: The households who traded the most generated the lowest returns. The average household earned 16.4% per year for the timeframe under study, while the most frequent traders only earned 11.4% per year.

Investor William Smead once said that “Your common stock portfolio is like a bar of soap. The more you rub it, the smaller it gets.” How true.

3. We know less than we think we do

“Here are the ideas I’m going to talk about: the first is an analogy between physics and investing… The foundation of Newtonian physics was that physical events are governed by physical laws. Laws that we could understand rationally. And if we learned enough about those laws, we could extend our knowledge and influence over our environment. 

That was also the foundation of most of the security analysis, technical analysis, economic theory and forecasting methods you and I learned about when we first began in this business. There were rational and predictable economic forces. And if we just tried hard enough… If we learned every detail about a company. . . .If we discovered just the right variables for out forecasting models… Earnings and prices and interest rates should all behave in rational and predictable ways. If we just tried hard enough.

In the last fifty years a new physics came along. Quantum, or subatomic physics. The clues it left along its trail frustrated the best scientific minds in the world. Evidence began to mount that our knowledge of what governed events on the subatomic level wasn’t nearly what we thought it would be. Those events just didn’t seem subject to rational behavior or prediction. Soon it wasn’t clear whether it was even possible to observe and measure subatomic events, or whether the observing and measuring were, themselves, changing or even causing those events.

What I have to tell you tonight is that the investment world I think I know anything about is a lot more like quantum physics than it is like Newtonian physics. There is just too much evidence that our knowledge of what governs financial and economic events isn’t nearly what we thought it would be.”

Investing involves human psychology, which is incredibly hard to model. The great physicist Richard Feynman apparently once said “Imagine how much harder physics would be if electrons had emotions.” That’s the problem we as investors have to deal with. 

Investing is not always a case of “if X, then Y.” According to a study done in 2004, South Africa’s economy expanded by 6.5% annually from 1900 to 2002, but saw its stock market rise by less than 1%. The Federal Reserve in the US started its bond-purchase programme, Quantitative Easing, in 2008. Investors thought back then that interest rates would rise when QE stopped since the Fed’s massive presence would be gone. QE officially ended in late 2014 but the Fed had stopped and restarted QE on a number of occasions. Morgan Housel showed that, contrary to the general idea, interest rates rose each time the Fed stopped QE between the beginning of 2008 and April 2013.

The good thing is you and I need not be helpless. We can work with sound investing principles that are backed by strong logical reasoning and evidence, and we can invest with humility by diversifying. 

4. The power of simplicity and consistency

“You are familiar with the periodic rankings of past investment results published in Pension & Investment Age. You may have missed the news that for the last ten years the best investment record in the country belonged to the Citizens Bank and Trust Company of Chillicothe, Missouri.

Forbes magazine did not miss it, though, and sent a reporter to Chillicothe to find the genius responsible for it. He found a 72 year old man named Edgerton Welsh, who said he’d never heard of Benjamin Graham and didn’t have any idea what modern portfolio theory was. “Well, how did you do it?” the reporter wanted to know.

Mr. Welch showed the report his copy of Value-Line and said he bought all the stocks ranked “1” that Merrill Lynch or E.F. Hutton also liked. And when any one of the three changed their ratings, he sold. Mr. Welch said, “It’s like owning a computer. When you get the printout, use the figures to make a decision–not your own impulse.”

The Forbes reporter finally concluded, “His secret isn’t the system but his own consistency.” EXACTLY. That is what Garfield Drew, the market writer, meant forty years ago when he said, “In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.””

I’ve previously shared in The Good Investors about how a simple portfolio of US stocks, international stocks, and global bonds have bested even the best-performing endowment funds of US colleges that invests in incredibly complex ways. Here’s another good one, according to Morgan Housel: “Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012… Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices.”

5. Investing without forecasts

“And when it comes to forecasting—as opposed to doing something—a lot of expertise is no better than a little expertise. And may even be worse.

The consolation prize is pretty consoling, actually. It’s that you can be a successful investor without being a perpetual forecaster. Not only that, I can tell you from personal experience that one of the most liberating experiences you can have is to be asked to look over your firm’s economic outlook and to say, “We don’t have one.”

Successful investing can be done without paying attention to economic forecasts. I have been investing for more than 9 years, and have never depended on outlooks on the economy. My focus has always been on a stock’s underlying business fundamentals. It’s the same when I was with the Motley Fool Singapore’s investing team – the prospects of a stock’s business was our primary concern. In his speech, Dean Williams also said “Give life a try without forecasts.” I have tried, and it’s been great. 

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Around 1.5 years ago, I read a piece of fascinating research from O’Shaughnessy Asset Management (OSAM) and the pseudonymous financial blogger, Jesse Livermore. The research provided insights on why value investing (essentially investing in stocks with low valuations) has worked in the stock market over long periods of time but has struggled in the last decade or so. 

I want to share the paper’s main findings and my takeaways, because value investing is popular among many stock market participants. 

Value’s success

The research found that stocks in the value category saw their earnings fall in the short run. The market was somewhat correct in giving such stocks a low valuation in the first place. I say “somewhat correct” because the market was excessively pessimistic. Value stocks eventually outperformed the market because their earnings recovered to a point where their initial purchase prices looked cheap – it was the initial excessively-pessimistic pricing and subsequent recovery in earnings that led to the value factor’s ability to deliver market-beating returns.

So the market was right in the short run, in the sense that value stocks will see a downturn in their businesses. But the market was also wrong in the sense that it was too pessimistic on the long-run ability of the businesses of value stocks to eventually recover. OSAM and Livermore’s research also showed that the value factor’s poor performance in the last decade or so can be attributed to the disappearance of the subsequent recovery in earnings of value stocks. The reason for the disappearance of the earnings-recovery was not covered in the paper.

My takeaways

First, investors can gain an enormous and lasting edge over the market simply by adopting a longer time horizon and having the courage and optimism to see past dark clouds on the horizon. The Motley Fool’s co-founder and chairman, David Gardner, spoke about the concept of “Dark Clouds I Can See Through” in an insightful podcast of his. The idea behind seeing past dark clouds on the horizon is that if you’re able to look past the prevailing pessimism about a situation, and if you’re right in your optimism, there’s success to be found on the other side when the clouds clear. OSAM and Livermore showed this empirically when they broke down the exact drivers behind the past successes of the value factor – investors who had the ability to “see” the subsequent recovery in earnings of value stocks were able to profit from the market’s short-term pessimism.

Second, I think it’s now more important than ever for investors to not buy value stocks blindly. The underlying mechanism behind the value factor’s past successes has been shown to be the initial overly-pessimistic pricing and the subsequent earnings recovery of value stocks. The recent struggles of the value factor, however, has been due to the inability of value stocks to produce an earnings recovery. To succeed with value stocks, I think investors should have a robust framework for analysing companies in the value category and think carefully about the probability of their businesses’ abilities to produce growth in the future.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Compounding is a well-publicised concept in investment. Essentially, it refers to the returns that an investor gets when he reinvests his earnings each year. 

Albert Einstein was said to have referred to compounding as the eighth wonder of the world. The power of compounding is also well illustrated by Warren Buffett’s own investment journey. Despite starting his investment journey at the ripe age of eleven, 99% of Buffett’s wealth was earned after his fiftieth birthday.

How you can compound your wealth

So how can the retail investors compound wealth over time?

Ser jing and I have formed a list of criteria that can help us find stocks that can compound meaningfully over the long term.

For instance, one of the characteristics we look out for is companies that operate in an industry that is growing. These companies tend to grow along with the industry. But that’s not all. We also want to pinpoint companies that can capitalise on the growing market, whilst increasing their market share at the same time.

Take Amazon.com for example. Well before the company reached its current size, shrewd investors could have identified Amazon as the next big thing. Jeff Bezos was a visionary entrepreneur who was focused on customer satisfaction. He realised the importance of a great customer experience, which enabled Amazon to dominate the growing e-commerce space. The signs back then were telling.

Even if you had bought in at the peak of the dot com boom, you would have made a 16% annualised return over 20 years. That’s a 2000% gain in just 20 years.

In addition, we also look for disruptors who can win market share in an already large industry or even create a whole new market on its own.

For instance, in the past customer relations management was not a big industry nor did companies truly identify it as a problem that needed solving. However, software such as salesforce has completed changed the way companies manage their customer relations. Nowadays, many companies cannot go a day without a customer relations tool. It has become an important software in some of the largest companies in the States.

Although much more prominent now, Salesforce is still small in relation to the potential addressable global market.

Time is your friend

Compounding is certainly a powerful investing concept. But, perhaps the biggest takeaway of all of this is that compounding works best the longer it is allowed to grow. Consider the example below.

If you have an investing life span of twenty years and are able to compound your wealth at 10% per year, your eventual returns will be 570% at the end of the investment cycle. Not too shabby. However, by adding just another five years to the investment time frame, you would have made a 980% return, 410% more in the extra five years. As you can see, time is indeed your friend when it comes to investing.

If you are thinking of investing but have not started yet, remember that the earlier you start, the more rewards you will reap in the future.

Hopefully, this post encourages readers to start their investment journey as soon as possible. With that, Happy compounding and invest on!

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.