Whenever I tell my friends that I write for The Motley Fool Singapore, I often get questions like “How should I start investing?” and “What should I do now?” I try to answer to the best of my knowledge each time I’m asked, but I also realise that many people whom I’ve never had the opportunity to meet in person may also have the same types of questions rolling in their heads. So, here’re three key ideas to help give you a head-start in your investing journey. 1) How to scout for investment ideas Individual investors are often worried that…
Whenever I tell my friends that I write for The Motley Fool Singapore, I often get questions like “How should I start investing?” and “What should I do now?”
I try to answer to the best of my knowledge each time I’m asked, but I also realise that many people whom I’ve never had the opportunity to meet in person may also have the same types of questions rolling in their heads.
So, here’re three key ideas to help give you a head-start in your investing journey.
1) How to scout for investment ideas
Individual investors are often worried that they’d be on the losing end when pitted against professional money managers; there may be a gap in the level of financial knowledge between the two groups and the latter may also have much more resources at their disposal to help them find great companies to invest in.
But, that can be a mistaken notion. Investing legend Peter Lynch, who delivered staggering compounded annual returns of 29% in 13 years with the U.S.-based Fidelity Magellan fund from 1977 to 1990, wrote in his best-selling investing book One Up On Wall Street:
“Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.”
One way to use your edge is to think about the products and services which you come across in your daily life often.
For instance, if you’ve always fancied snacks like curry puffs and fried fish balls, then Old Chang Kee might just be a brand of retail outlets you trust that’s hawking your favourite snacks. As it turns out, it’s run by Old Chang Kee Ltd (SGX: 5ML), a firm whose profits have grown by 47% to S$5.3 million between the fiscal years ended 31 March 2012 and 31 March 2015 and whose shares are up nearly 140% in price since June 2012.
2) Look at stocks as a business and not some random ticker whose price fluctuates daily
The reason why many people fear to step into stocks is primarily because of one thing – market volatility. There are always horror stories of how some investors had “burned their fingers” by selling their shares after the market had crashed.
For some time, my spouse also had this same risk-averse mindset until I shared with her this saying from the sage-like investor Warren Buffett: “If you own your stocks as an investment – just like you’d own an apartment, house or a farm – look at them as a business.”
There’s great benefit in doing what Buffett admonishes.
Source: S&P Capital IQ
As my colleague Chong Ser Jing had noted before, vehicle inspection and testing outfit Vicom Ltd (SGX: V01) had seen its shares collapse by 28% from peak-to-trough during the Great Financial Crisis of 2007-09. Investors who focused on only Vicom’s share price would have thought that it was a horrible investment.
But those who had looked at how its business had performed, in particular how its profit had grown (see chart above), can see that it had managed to make its business even more valuable even in horrible economic conditions. From its pre-crisis peak of S$1.98 in August 2007, Vicom’s shares are today up by more than 213% to S$6.20.
3) Leave yourself plenty of room for error
Finding great companies that are easy to understand is only the beginning. While Buffett is well-known for investing in great companies for the long-term, he’s also equally known for demanding a fair or even cheap price in relation to the company’s value.
By doing so, he’s given himself plenty of room for error – in investor-speak, this is known as a margin of safety.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn't own shares in any companies mentioned.