How Should Students Invest – A Reqiuem

The question “How should students invest?” was asked in a panel discussion at the recent Singapore Financial Conference organised by the Nanyang Technological University’s Investment Interactive Club on 27 March.

In The Business Times’ account of the event, I found one particularly great bit of advice from the panel’s moderator, Richard Dyason. Dyason, the general manager of the Securities Investors Association (Singapore), was quoted by the newswire as saying:

“Spend on things that accumulate knowledge, because that’s what’s going to build your wealth in the future.”

For me, that’s a beautiful thought for young investors as investing-knowledge does compound over time. And just like money, the earlier you’d start compounding knowledge, the wiser you’d be at the end of the day.

As I was still a student myself not too long ago (I graduated from university barely three years ago in 2012), I’d love to help jump start the learning process for other students. So, here’re some important things about investing that can help students, new investors, and even old-timers.

1. Knowledge of what the stock market really is

The stock market, at its core, is really a marketplace where we can buy and sell pieces of a business. When you accept that, you’d start to look at things very differently.

Whereas stock prices jump up or down on a daily basis, a business’s value changes at a much slower pace. Whereas share prices can crash from time to time (remember the financial crisis years not too long ago?), great businesses can go on to become even more valuable even during the worst of times.

The latter is exemplified by the experience of shares like Vicom Ltd (SGX: V01) and Dairy Farm International Holdings Ltd (SGX: D01). During the Great Financial Crisis of 2007-09, both shares experienced sharp peak-to-trough declines of 28% and 33% respectively.

But as you can see in the chart below, both firms managed to grow their profits admirably through the crisis-years. In so doing, they’ve managed to make their businesses even more valuable even in horrendous market conditions.

Vicom and Dairy Farm's profit growth

Source: S&P Capital IQ

My colleague Morgan Housel once wrote:

“Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing.”

A focus on the movement of stock prices can easily lead one to lose his or cool. But by keeping a closer watch on the progress of a share’s underlying business, it may be far easier for us to keep our calm.

2. Knowledge of how time can boost your odds of success in the market

You may be surprised to know this, but over a period of more than 130 years from 1871 to 2012, the S&P 500 (a broad US stock market index) has not delivered any losses at all for investors who have a 20-year holding period or more.

This striking relationship between your odds of success in investing and your time in the market is encapsulated in the chart below which came from Morgan:

Stock market's long term returns

While I don’t have data going that far back for Singapore’s own stock market barometer, the Straits Times Index (SGX: ^STI), I do have a similar finding.

If we measure the index’s return at the start of every month from 1988 to August 2013 (that’s a timeframe of nearly 25 years), there’s a 41% chance that an investor would suffer losses for a 1-year holding period. If we extend the holding to period to 10 years, the chance of making a loss shrinks to just 19%. If we then double that holding period to 20 years, an investor wouldn’t suffer any losses at all.

3. Knowledge of what it takes to earn great returns in investing

As I alluded to earlier in the first point, a share would see its price track the performance of its business over time. But, it’s important to know just what “over time” really means.

On occasion, an investor’s patience can be severely tested, though the rewards at the end would make the painful wait entirely worthwhile.

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) would be a great example. Having started March 1999 at a price of S$0.545 per share, investors in the firm would have nearly nothing to show for it by the time 15 November 2008 came rolling around as the shares were worth just S$0.56 each back then. This happened despite the firm having grown its profits from S$3.7 million to S$31.5 million over the same period.

But today, with Raffles Medical earning a profit of S$68 million in 2014, the company’s shares are worth S$3.91 apiece, some 617% higher than where it was in March 1999.

A Fool’s take

Young students have the most powerful weapon in the world when it comes to investing – time on their side. I hope what I’ve shared can help students shorten their learning curve and give themselves even more time to let compound interest work its magic.

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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 Vicom and Raffles Medical Group.