Wednesday, January 27, 2010

Tips for successful investing

Mon, Oct 12, 2009
The Business Times

Investment director
IPP Financial Advisers

MONEY cannot buy love but it can buy happiness. The topic of money is one of the most important in our lives. Preoccupation with this subject is universal, since it is of concern to nearly all humans. Even the Bible expounds at great length about our attitude towards money and our responsibility towards its proper stewardship. The main cause of divorces around the world has been shown to be argument and struggles over money. I have also seen people who have gone from riches to rags, and from rags to riches.

Ironically, money has no bearing on the degree of joy, as joy is a reflection of contentment. Money, however, does have a significant impact on happiness because one can buy temporal happiness with money. Just think of a man who becomes happy when he gets his hands on the latest fast car or gadget, or a woman who can't stop smiling, with the coveted 'it' bag of the season on her arm.


In the past 20 years, I have made my fair share of mistakes in investment. I went through the 1987 crash, the 1998 currency crisis, the 2000 technology bubble, 2003 Sars and the 2008 Great Recession. Having gone through all these, I realised that success in investment depends on many facets. It is both a science as well as an art.

More importantly, one's ability to manage fear, greed and risk will determine whether you invest successfully. Successful investing also involves the discipline of sticking to a long-term strategy planned to achieve your goals, together with an appropriate short-term strategy for the season; in other words, there is no short cut in investment and there is no magic formula.

There are many successful investment gurus whom we can look at to acquire knowledge and whose wisdom we can ride on for financial success. I will share some of the wisdom that I have picked up over the years.

If you want to prosper, investigate before you invest; short cuts do not work well. I once invested in a very promising health-related business that had strong sales and a loyal following. However, the company lacked experience and strong management capabilities. The company expanded too fast and eventually had cashflow problems. I learnt from this investment that investing in other people's business carries the highest risk, and good management is more important than a good business.

To achieve success, be a realist with a hopeful nature. John M Templeton once said, in investment work, you cannot afford to be an optimist or pessimist; if you are going to succeed, you need to be a realist. It is human nature to lean towards either extreme as we are easily influenced by sentiment and public opinion. It is tougher to be a realist. A realist is someone who has evaluated the facts and figures (which requires hard work) and has arrived at an objective view. A realistic person accounts for the possibility that he could be wrong if certain scenarios do not take place. When that happens, he would not be too stubborn to change position and admit his mistakes. David Stockman, ex-president Ronald Reagan's budget director, said that when the basic direction of reality changes, you have got to get with it.

Manage your risk and learn to ride through tough times. I once met a billionaire who told me that a person's dream can turn into a nightmare if he cannot manage his cashflow. His nightmare can in turn be someone else's dream come true. He was referring to over-leveraging, especially in the property market. If servicing your home loan requires 80 per cent of your disposable income and daily expenses take up the rest, would you be able to continue with mortgage payments should you suddenly lose your job? Avoidance of over-leverage applies to all types of investment.

Patience is a virtue. Time in the market is more important than timing the market. Most contra players in the stock market lose money because they have to get the direction right within a specific timeframe; that is like fighting two wars at the same time. However, someone with a longer investment time horizon can have the luxury of waiting for their investment to bear fruit. Think of Warren Buffet, who has held Coca-Cola stock since 1988.


Diversification is a must. Different financial instruments carry different risks and rewards. The correlations of equities, bonds, hedge funds and commodities are quite low when packaged into a portfolio. In general, with the exception of last year, these instruments do not go up and down together. Therefore, in a market collapse, you should find some protection in a diversified portfolio that has some of the mentioned asset classes.

Profit-locking is paramount to long-term success in investment. One of the world's most prominent hedge funds adopts this strategy conscientiously. An investor should set a goal of locking in at least 50 per cent of his profit every year. I have seen too many cases where a client's investment profit went up substantially, only to have the paper profit evaporate totally in a down cycle.

There is a common belief among some that one should always stay invested regardless of what happens to the external environment. I do not fully subscribe to this view as there is a season for everything. It is wise to stay invested but the asset allocation should be adjusted to suit the investment climate. There are times that we should be fully invested and there are times to have more in cash. There is nothing wrong with holding cash even though deposits are not paying much. When asset prices fall, the same amount of cash can buy more - this is like having a higher return.

If things still don't go well despite adopting the above guidelines, remember that money has four legs and we have only two; money runs much faster than we do. Therefore, one must save and invest regularly. An investment that yields inferior returns for a period of time is better than not having the discipline of putting aside a fixed sum for savings or regular investment.

Summing up, having the right mindset towards money management would help us stay focused on accumulating for the long term and handle market volatility with relative ease. Believe in what you are doing and stay determined in following through on your plan.

This article was first published in The Business Times.

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