How To Win At Investing

I have a very simple rule when it comes to investing – Never lose money.

I might not make money from my stock picks in the short term. But that is alright.

That is because I never expect to make money from my selections in the short run, anyway. And secondly, I know that in the long term, my stock picks, provided I have done my homework properly, should come good and reward me, handsomely.

Why is that?

Peter Lynch once said: “If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.

The key to making money

And that is the key to successful investing.

We have to study the company. We have to study its competitors. And we also have to study the environment that the companies operate in.

In the short term, we have to accept that anything can happen – literally anything.

But in the long term – provided we have researched our companies properly – then our picks should do well. What’s more, just because a share goes down in price doesn’t mean that we are wrong.

In the end, superior companies will succeed and ordinary companies will fail, and investors in each will be rewarded accordingly.

That is why it is important to always look for top-quality companies. These are businesses that stand out from the rest.

Why oh why?

Of course, the often-heard complaint from investors is that superior companies are always too expensive.

There is, unfortunately, some truth in the lament. Superior companies seldom sell at a discount. But when they do, what do we do? We run a mile.

How many of us, for instance, fall into the trap of feeling elated when a stock that we own soars but feel terrible when it sinks.

Real investors should in fact be celebrating when their favourite stocks dive. That is where bargains can be found. And bargains are the Holy Grail of the true stock picker.

That is how great fortunes are made over time.

How many of us, for example, felt terrible when Singapore Exchange (SGX: S68) fell from a five-year high of around S$10 to a low of about S$6.

Win when you lose

The stomach-churning drop would have been enough to demoralise even the most battle-hardened investor with the strongest constitution.

Today, the shares – whilst not quite back to their high of October 2010 – are considerably higher than at their nadir

But here is the really interesting part. On a total return basis, the shares are already in profit, even if you had bought them at S$10 a pop. Yes they are.

The total return, which takes into account both capital changes and dividends, can be an unfamiliar concept to some. That is because it is hard to imagine how insignificantly-small dividend payments can make a big difference to our investment returns. But make no mistake, dividends matter. They matter a lot.

In Singapore, we have many companies that pay generous dividends. But here is something for you to think about.

Singapore vs. America

Much has been made of the rise of the US market. Additionally, some have been disparaging about the performance of Singapore shares.

But did you know that over the last 12 months, the total return of the Singapore market has outperformed the Dow Jones Industrial Average?

It is hard to imagine but it is true.

In the last 12 months, our Straits Times Index (SGX: ^STI) has risen around 8%. The Dow Jones Industrial Index has also gone up by 8%.

But when dividends are considered, the total return of 11.1% from our top 30 companies trumps the 10.6% return by America’s top 30 corporations.

So start putting those dividends to work today without delay. It is always better in than out, as they say.

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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 Director David Kuo doesn’t own shares in any companies mentioned.