One of the most fascinating things about us humans is that we always want to figure out how things work and how we can make it better. I was reading an article the other day about deconstructed cuisine. When chefs deconstruct recipes, they try to identify the ingredients of a traditional dish and rearrange them in a more distinctive manner. They hope to make the dish look and taste better than the original. The humble apple pie The deconstruction recipe that I happened on was the humble apple pie. I ask you – why would anyone want to deconstruct something…
One of the most fascinating things about us humans is that we always want to figure out how things work and how we can make it better.
I was reading an article the other day about deconstructed cuisine. When chefs deconstruct recipes, they try to identify the ingredients of a traditional dish and rearrange them in a more distinctive manner. They hope to make the dish look and taste better than the original.
The humble apple pie
The deconstruction recipe that I happened on was the humble apple pie.
I ask you – why would anyone want to deconstruct something as simple and as tasty as mother’s apple pie. What’s more, what is there to deconstruct, when the key ingredients are stewed apples and pastry?
How wrong could I be?
The simplicity of the deconstructed recipe even prompted me to have a go myself. I think it turned out quite well, though it was the first time that I have ever eaten apple pie out of a glass tumbler.
But what, you may rightly ask, has this got to do with investing?
Deconstruction can be an important part of our investing. For some of us, investing in shares through a low-cost stock market index tracker or a more expensive mutual fund is about as far as we are usually prepared to go.
In a box
After all, why would anyone want to make their own deconstructed apple pie when they can easily take a ready-made pastry out of a box?
There is nothing wrong with that logic at all. Ready-made foods have been a godsend for the time-poor consumers who have cash to spare. However, there can be nothing quite as satisfying as doing it yourself.
Trouble with those off-the-shelf packages is that you have to accept what you are given. On the other hand, if you choose to do it yourself, you can judiciously select the bits that you want, leave out the bits you don’t like, and blend them to suit your requirements.
Consider something as elegant as the Straits Times Index. There are some perfectly good index trackers out there that will mimic the performance of Singapore’s benchmark index. There are even some closet trackers that could be dressed up as managed funds that will mimic the index too, but badly.
Beating the market
Since its inception, index tracker SPDR Straits Times Index Exchange Traded Fund (SGX: ES3) has delivered a total annual return of 8.7%. In other words, over the last 12-and-a-bit years, an investment of S$1,000 in the index tracker would have turned into S$2,813.
That is not too bad, you might think. And you would be right. It would have been better than leaving your money in a savings account.
Interestingly, the return from the index tracker closely matches the returns from DBS Group (SGX: D05), United Overseas Bank (SGX: U11) and Oversea-Chinese Banking Corporation (SGX: O39). The three Singapore banks have delivered annual returns of 7.2%, 8.2% and 8.7%, respectively.
The reason for the close correlation is because the three banks account for almost a third of the Straits Times Index (SGX: ^STI). They can carry tremendous sway as to how the index performs.
But what if you wanted more? What if you wanted to outperform the index significantly?
Well you could.
No fewer than half the members of the benchmark have outperformed the index. These include Singapore Exchange (SGX: S68), Sembcorp Marine (SGX: S51) and Jardine Cycle & Carriage (SGX: C07), which together only account for 6.5% of the index. But the three companies have separately outperformed the index by a considerable margin.
Choosing what goes into your portfolio and what stays out is how we can become better investors. Just as deconstructing a recipe can be very rewarding, so too can deconstructing a stock market index.
Warren Buffett once said: “The stock market is a no-called strike game. You don’t have to swing at everything – you can wait for your pitch”. He’s right.
This article was first published in Take Stock Singapore.
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