I am sure most of us would like to be better investors. But have you thought about what it actually means to be a better investor. Investing better may seem a bit like a movable feast – it can mean different things to different people. But at the very least, our aim as private investors should be to outperform the market. The point is this: If you cannot even beat the returns for, say, the Straits Times Index (SGX: ^ST), then you could save yourself a lot of anguish by investing through a stock market index tracker instead. For instance,…
I am sure most of us would like to be better investors. But have you thought about what it actually means to be a better investor.
Investing better may seem a bit like a movable feast – it can mean different things to different people. But at the very least, our aim as private investors should be to outperform the market.
The point is this: If you cannot even beat the returns for, say, the Straits Times Index (SGX: ^ST), then you could save yourself a lot of anguish by investing through a stock market index tracker instead.
For instance, if you had invested S$10,000 in the Singapore stock market ten years ago, then your portfolio should be worth at least S$25,750 by now. That is how much a stock market index tracker, such as the SPDR Straits Times Index ETF (STI) (SGX: ES3), would have delivered over the last decade.
Where did I go wrong?
In other words, if you haven’t achieved a total return of around 10% a year over the last decade, then you might want to re-visit your approach to stock market investing. And one thing that many of us tend to get wrong when buying shares is hanging onto obvious losers in our portfolios.
Warren Buffett once said: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
In other words, if you have invested in the wrong shares, then buying something better might be preferable to patching up past mistakes.
Living in the past
Learning to let go of the past is probably one of the most important lessons in investing. For some investors, though, it is almost second nature. So for those enlightened investors what has happened before is of no relevance now. What matters is what could happen in the future.
That said, it is never easy to forget the past, because it is always hard to let go of what is old and familiar. That applies not only to old habits and practices but also to shares in our portfolios.
However, learning how to let go is vital if you want to take the first important step to become a better investor. After all, if your limited resources are tied up in patching up what you have, then you are much less likely to look for something else that could serve you better.
When we invest, we should always bear in mind that buying shares is about putting your money to work. That means looking at opportunities that will deliver the best possible returns for our capital.
That also means looking dispassionately at each of our holdings and deciding whether it merits a place in our portfolios. An often telling question is whether you would still buy a particular share if you did not already own it.
If the answer is no, then why are you still holding it?
Just like starting over
Some years ago, I happened upon a great book by hedge fund manager Michael Steinhardt called No Bull. Steinhardt was a prolific investor but he admitted to occasionally starting his portfolio all over again from scratch.
At the drop of a hat, Steinhardt would sometimes liquidate all his positions. So in an instant, he would have a bag of cash and a clean slate to work with. Steinhardt said it felt stimulating to rebuild a portfolio from scratch – liberated from what he called wishy-washy legacy holdings.
I am not suggesting that we all go out and liquidate our portfolios this instant. However, it can be instructive to regularly write down all the shares that we would like to own, and the reasons why we would want to own them.
And here’s the rub: If we find that none of those names appear in our existing share portfolios, then like Steinhardt, we should, perhaps, think seriously about starting afresh.
It takes great courage to liquidate all our shareholdings and to start afresh a la Steinhardt. For some investors it can be tantamount to admitting failure. But sometimes it is our failure to admit to past errors that may be holding us back from being better and more successful investors.
This article first appeared in Take Stock Singapore.
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