The Stock Market Is More String Than Pearls

Foreword from ShareInvestor

This article “The Stock Market Is More String Than Pearls” by Cai HaoXiang was first published in The Business Times on 18 Dec 2017 and is reproduced in this blog in its entirety.

A guide to investing through the good, the bad, and the boring.

Life has been compared to pearls on a string: long stretches of the mundane, followed by concentrated moments of unforgettable iridescent intensity.

As goes life, so goes investing in the stock market. For instance, most companies you will encounter are run-of-the-mill. You will be lucky to make a return of a few percentage points a year on them through business cycles.

Pearls are rare. Much has been written about growth stocks and tenbaggers. The latter is a term coined by fund manager Peter Lynch in his memorable book, One Up On Wall Street.

Yet for every Apple or Nestle or Jardine play, there are hundreds of other companies that don’t match up. There are dozens of potential pearls discarded too early. And there are also traps like Noble Group and Swiber Holdings.

Meanwhile, stock markets also spend a lot of time not going in any direction: string. Pearl-like periods of opportunity, characterised by buying and selling frenzies, happen rarely.

Thus life in the stock markets comprises more string than pearls. Not only will ordinary investors make mediocre returns, they will be bored to tears too. The danger is they only jump in to make unwise decisions when moved by the crowd.

What can you do to improve your chances?

The first principle is to guard your portfolio against traps. This means educating yourself on how to read balance sheets, and staying away from companies that take on a lot of debt.

A nugget of wisdom from investor Warren Buffett rings true here: “Rule No. 1, never lose money. Rule No. 2, don’t forget rule No. 1.”

Your portfolio may have run along fine, with most stocks up or down 5 per cent to 10 per cent a year, possibly with a delightful twobagger. But have a stock down 50 per cent in there, and your overall returns are decimated.

The second principle is to study the market as much as you can during the long periods of “string”.

During this downtime, don’t switch off. Keep on familiarising yourself with the universe of stocks out there, especially beyond what the brokers recommend. Keep preparing for the unexpected.

For much of 2016, many analysts wrote off electronics and semiconductor-linked stocks. The world, and the industry, was experiencing slow growth.

For instance, though industry association Semi suggested as early as March 2016 that fabrication equipment growth would be in the double digits last year, very few took note.

Everything changed towards the end of the year, when the rally began in earnest. A year later, many semiconductor-related stocks are among the top performers of 2017, having doubled or tripled in value on the local bourse as well as elsewhere.

Yet how many of us truly had a grip on the entire sector, booming in front of our noses? How many jumped in as early as we could?

For those entering the workforce, there is another thing to note.

In your first 10 years, the market isn’t likely to make you rich.

Rather, you will have a far better chance of accumulating your first pot of serious money by being disciplined about your spending and seeking out new revenue sources, be it through a promotion, a new job, or a side gig.

Consider, for example, how much capital you might need to generate $12,000 a year, or $1,000 a month.

Assuming 4 per cent returns a year – by no means a bad result for a beginner investor – you will need $300,000 deployed in a diversified portfolio of stocks to make that $12,000. You’ll also need plenty of years to get there, learning about what works and what doesn’t.

It might be more efficient to first figure out how to save or earn that extra $1,000 a month.

Ultimately, the stock markets are a lifetime pursuit. Those planning to get into it have to first slowly accumulate their savings while developing the temperament not to recklessly throw it all away.

The same temperament will guide you through market cycles and the long, boring moments of string. By then, you will have enough wisdom to capitalise on the pearls that appear.

In life as well as in investing, sometimes that’s enough.