The Best Investors Stay Hard-headed

Foreword from ShareInvestor

This article “The Best Investors Stay Hard-headed” by Goh Eng Yeow was first published in The Straits Times on 06 Jul 2014 and is reproduced in this blog in its entirety.

They know how much risk they can handle and their desired returns, plus they have a pretty pile of cash

As an old hand at financial writing, I often get asked by people what I think is going to happen in the stock market, but of course, I don’t know. Nobody does.

That is not the reply people expect or what they want to hear but they seem to appreciate the candour – and I certainly don’t blame them for asking.

There is a part in all of us that fears uncertainty and longs to be in control of the situation. To get around this fear, the financial sector hires an army of expensive analysts to regularly issue forecasts and predictions.

A big industry has also grown up around this fear of the unknown, with investors handing over millions of dollars to highly paid financial advisers to try to make more money for them.

But as one wealthy friend, who has had bad experiences with financial advisers, once observed, the consolation is that the multi-millionaire may not be getting better investing advice even though he is paying a lot of money for it.

If anything, ordinary people may be getting exactly the same advice as the rich but at a tiny fraction of the price.

However, I can understand the anguish of savers – including myself – as we desperately search for a way to get a decent return on our nest eggs in this extremely low interest rate environment we have been stuck in for the past six years.

We are averse to losing money on any investment we make with our hard-earned cash but we find the prospects of negative real interest rates on our savings equally daunting.

And when we find people, especially those closest to us, making money on their investments, we are tempted to try to score big-time ourselves, even though it means taking risks we cannot afford.

I once went to a seminar where a bank’s chief investment officer reminded his audience that even with a low inflation rate of 3 per cent a year, that would mean that in 10 years’ time, the real purchasing power of their savings would be eroded by 30 per cent.

It is a seductive argument, playing on the anxiety of the participants that if they leave their cash under the proverbial mattress, they would lose a lot of money.

But the problem is that in trying to get a higher return, they may lose even more money by picking up an unsuitable structured deposit or, worse, a shoe-box condo unit they cannot rent out.

To practised hands like me, the speaker should have included another time-tested truth in his argument – that markets move in cycles. As such, if an investor sticks to buying some units of the Straits Times Index exchange-traded fund every month for his entire life, he is more likely than not to beat almost everyone else on his returns.

It also pays not to be over-hasty in rushing into investments.

Over the past 20 years, I have encountered five major market meltdowns – the Asian financial crisis in 1998, the dotcom bust in 2000, the terrorist attacks on the United States in 2001, Sars in 2003 and the global financial crisis in 2008.

In each of those, an investor would have made a pile of money if he had been brave enough to move in and load up on blue chips amid the sell-offs.

Recently, I received e-mails from a 55-year-old single working mother who raised three children by herself. She had just inherited a sum of money and found herself inundated with proposals on how to invest her sudden windfall.

Looking at the proposals, I felt that she might end up poorer if the market turned against her. While the projected returns might be high, they also came with big risks. For someone who had to work hard to raise a family single-handedly, that might be unacceptable.

That is why an investment proposal should never be examined in isolation. An investor should pay attention to non-investment issues such as his age and job. For example, if he is working in the financial sector, he may not want to hold just bank shares as doing so may further concentrate his risks.

Above all, be a realist. There will always be ups and downs in the market. The best investors stay hard-headed about the risks they can handle and the returns they want.

They also keep plenty of cash. They don’t get panicked into allowing bad things to happen to their good money.