There are a-great-many investing quotes. But, there’s nothing quite like a stinging one-liner which cuts to the chase and tells you exactly what you need to know. Here are three such one-liners for investors wanting to know what investing is all about. 1. “As many advisors have told us, your investment portfolio is like a bar of soap. The more you handle it, the smaller it gets” – William Smead This quote from money manager William Smead goes right to the core of one of the main destroyers of investors’ share market returns: Over-trading. Source: John Maxfield,
There are a-great-many investing quotes. But, there’s nothing quite like a stinging one-liner which cuts to the chase and tells you exactly what you need to know. Here are three such one-liners for investors wanting to know what investing is all about.
1. “As many advisors have told us, your investment portfolio is like a bar of soap. The more you handle it, the smaller it gets” – William Smead
This quote from money manager William Smead goes right to the core of one of the main destroyers of investors’ share market returns: Over-trading.
Source: John Maxfield, Fool.com
The chart above plots the 20-year annualised returns for the S&P 500 (a market barometer for the U.S. stock market) against that of the average equity fund investor in the U.S. – and as you can see, the average investor has trailed the market badly.
Investment research outfit DALBAR, which is responsible for the figures displayed in the chart above, credits investors’ poor attempts at jumping in and out of their investments as a big reason for the phenomenon seen in the chart. In other words, investors who weren’t patient enough to hold on to their funds for the long-term ended up paying for it.
DALBAR’s research is hardly the only piece of evidence which shows how over-trading can decimate investors’ returns. Professors Brad Barber and Terry Odean also once penned a famous study titled “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors”. Barber and Odean’s conclusion is rather obvious from the title of their paper, but there’s a good reason for them using the word “hazardous” – they found that individual investors who traded the most underperformed the market by 6.5% annually!
This again underscores the need for patience when it comes to investing and ties nicely to our second quote.
2. “It is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens” – Philip Fisher
Great companies – those with growing sales, profits, cash flows, and assets – tend to see their share prices do well over time. Poor companies – those suffering from all kinds of business difficulties – meanwhile, would eventually see their share prices decline.
The problem though, is we can’t quite tell when a great or poor company would see its share price reflect its underlying economic and business fundamentals. We can only take it on good faith that it will eventually happen. And this is how the first and second quotes connect: At times, we’d need to be patient and wait for the share prices of great companies to grow.
The healthcare provider Raffles Medical Group Ltd. (SGX: R01) is one such example. In March 1999, its shares were priced at S$0.56 and it earned S$2.6 million in profit. By November 2008, the company’s profit had swelled to S$31.5 million (a more than 1000% jump!) but yet its shares were actually selling for S$0.55. It’s only with patience that investors can see Raffles Medical’s shares at S$3.91 today, some 600% higher than where it was back in March 1999.
3. “Simplicity or singleness of approach is a greatly underestimated factor of market success.” – Garfield Drew
Investing is not a field where you win only if you utilise complex strategies and find complicated investments. In fact, simple can win too.
Consider the example of the Goldman Sachs Rising Dividend Fund. This is how the U.S.-based fund describes its investing strategy:
“In selecting investments, the Fund employs a proprietary 10/10 test designed to identify companies that increase their dividend by 10% per year on average, for 10 years in a row.”
With an adherence to its simple 10/10 test, the Rising Dividend Fund has swash-buckled its way to market-beating returns: As of 31 August 2014, the fund has generated total compounded annualised returns of 9.28% since its inception on 23 March 2004 while the S&P 500 has grown by just 8.18% per year.
Foolish Bottom Line
All told, here’s what the three quotes above tell us about investing: 1) Over-trading kills your returns; 2) you can’t predict when a strong company’s share price will move up, but you know that it will somewhere down the line; and 3) simple investing strategies can win too.
Have any more great investing one-liners? Share them below!
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group.