Forget Hot Tips, It’s All About Strategy

Foreword from ShareInvestor

This article “Forget Hot Tips, It’s All About Strategy” by Goh Eng Yeow was first published in The Straits Times on 11 Oct 2009 and is reproduced in this blog in its entirety.

New investors can grow nest egg by focusing on some simple rules

Considering how much time we spend grappling with our finances and trying to build nest eggs for retirement, it is amazing that financial literacy is still not on the core educational curriculum.

The recent global financial crisis has emphasised once again the importance of financial literacy and taking charge of one’s financial affairs, rather than relying on an investment adviser or bank relationship manager whose motivations may not always be aligned with those of their clients.

Over the years, I have met many highly successful people – marketing directors, writers and lawyers – who appear to be masters of their destinies, but who have floundered hopelessly when it comes to their personal finances.

And when the discussion turns to the stock market – as it inevitably does when they discover I am a markets writer – these otherwise sensible people always ask me for “tips” on what stocks to buy.

Surely since I track share prices daily, I should know the inside track to riches on the stock market, their argument goes.

But things are never quite so simple on the stock market. There are always a multitude of factors at work and it is next to impossible to predict what is going to happen next to a certain stock.

These people sound disappointed when I tell them that I do plenty of analysis before making any investment decisions.

Making sound investment decisions is hard work and involves plenty of patience. Successful investors will tell you they track some stocks for years – sometimes for decades – before they would even touch them.

But that does not mean that the novice investor should abdicate his own role in investing responsibly, simply because he has not been following the stock market long enough – or that he has not been equipped with the know-how to read a company’s financial statement.

It is not true that one has to be a Warren Buffett or John Templeton – two of the greatest investors in recent times – to build an investment nest egg successfully.

There is also no need to spend a fortune attending seminars promising quick routes to riches in the financial markets. They almost inevitably lead to disappointment when the riches fail to materialise.

Sure, it is almost impossible to predict how the stock market may behave daily, but there are some good strategies which can enable an investor to ride out the turbulence and grow his nest egg safely. Some of them are as follows:

Be a contrarian. Do not buy popular stocks which other investors are also chasing. This is not to say that the crowd is wrong, but the share price could have been chased up to a level which reflects the crowd’s wisdom – leaving it with only limited upside potential.

Instead, a great way to make money is to go against the crowd, and buy only when the investing public has turned extremely negative – like between September last year and March this year.

Resist the urge to trade frequently. An investor should not trade in and out of the stock market frequently, as this may put him at risk of being caught by a sudden bout of market convulsion. This was what caused many traders to lose their pants during the wild price swings last year.

Instead, he should cultivate the patience to wait for a long time to pick up the stocks of great companies on the cheap, if market turbulence causes their prices to fall.

Stick with what you know. As a markets writer, I have come across numerous instances of traders chasing after the latest sexy plays on the stock market. But when I probe a little deeper, I rarely find that they are aware of what business these counters are involved in – or what is so attractive about these stocks in the first place.

I have also yet to meet an investor who has amassed a huge fortune just by relying on “tips” to invest in stocks.

It is best not to invest in a company when you do not know its products, or how it makes its money.

Start investing in index funds. Unlike an earlier generation of investors who had to pick stocks carefully to build their nest eggs, a novice investor today can start by setting aside a small sum of money each month to buy into a stock index fund like the STI exchange-traded fund, which tracks the Straits Times Index, or the Hong Kong’s Tracker Fund which mirrors the Hang Seng.

For example, buying the STI ETF will give you exposure to a basket of Singapore blue chips such as Singapore Airlines, DBS Group Holdings and City Developments.

Its dividend payout of 4.6 per cent is also far higher than the paltry 0.125 per cent interest paid on a POSBank’s savings account.

While an investor can get very emotional playing individual stocks – with all the swings in prices that come along with it – buying into an index fund offers greater price stability and almost guarantees long-term growth on investments.