The Gigantic Advantage of Investing Small – Part 1

For some, investing with a small sum of money may sound like a waste of time.

But I am here today to talk about how making small investments may actually be an advantage for the Foolish investor. I should know – I base my own investing on the approach of investing small. This will be a two-part series, so let’s get started.

Staying invested for the long term

“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” – Peter Lynch

When it comes to investing, most investors appear to have a dying need to be right all the time and often, “being right” means seeing the price of the stock you choose go up.

But, it’s not possible to consistently pick the tops and the bottoms for a stock. Fortunately though, investing can still be a very satisfying activity even when we have no ability to find those tops and bottoms.

Take Sarine Technologies Ltd (SGX: U77) for instance. In the table below, I have summarised the annual change in the company’s share price from the start of 2006 up till the end of 2014.

Year Sarine Technologies’ share price change
2006 -31%
2007 -11%
2008 -78%
2009 178%
2010 88%
2011 23%
2012 79%
2013 84%
2014 27%

Source: Google Finance

Shares of Sarine Technologies are currently down by 5% in the year-to-date. This is somewhat similar to the years 2006 to 2008 when shares of Sarine Technologies crumbled in the light of the global financial crisis.

While the investor was “wrong” (shares had fallen in price) with Sarine Technologies from 2006 to 2008, the patient investor would have stood to gain 693% if he or she had simply held the company’s shares from the start of 2006 to the end of 2014.

When we dig into the underlying business of Sarine Technologies, we can see why the company’s shares had become a long-term winner: The firm had quite simply, managed to grow its revenues and profits materially over the years.

Starting small

Sarine Technologies’ long-term gains may now look obvious in hindsight, but it wouldn’t have been easy at all for an investor to have held the company’s shares through three years of poor returns from 2006 to 2008.

This is where investing through small positions can help the Foolish investor to stay invested for the long-term. Smaller positions in a company’s shares can assist the Foolish investor to resist the temptation of selling too soon – especially when the going gets rough and shares tumble. Sitting through rough declines while staying invested can in turn be an invaluable learning experience for the Foolish investor too.

For me, I would avoid investing even a cent above my comfort zone.

That’s why I wouldn’t feel the pressure to sell in the face of a falling share price. Instead, keeping within my comfort zone has helped me focus on what’s important – the business behind the ticker and the act of staying invested for the long-term.

Over time, I have come to appreciate the value of taking small positions, learning about the company and adding to my winners over time – the latter two are the things which I’d be discussing next in my second article in this series.

For more investing analyses, insights, and important updates about Singapore's stock market, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.