Monday, April 16, 2018
Turning cents into dollars (small change book 2)
I just finished reading "Turning cents into dollars (small change book 2) by Goh Eng Yeow.
This is a compilation of articles written by Mr Goh Eng Yeow into a book.
Below are some of the contents from the book - to remind myself:
(1) Doing good brings goodness
Compassion is a two-way street. Those touched by compassion will reach out to help others. Indeed, many go beyond donating money or goods to adopting charitable causes, giving generously of their time to teach poor children or help out at an old folks' home.
Our lives would be assessed, not based on dollars, but on the people whose lives we have touched.
It is an affirmation that what goes around comes around. By doing good, we will be rewarded with goodness.
(2) Knowing when enough is enough to get by
Being wealthy is not necessarily about having lots of money. Rather, it is about holding plenty of cash, and being able to maintain your standard of living and take care of your family without facing the risk of running out of money.
(3) What it takes to be rich
Sure, most of us believe that the more money we have, the happier we will be. But if we really want to have a fulfilling life, it is not the wealth we have accumulated that matters. It is how we spend it that counts. Wealth should not just be measured in material terms. As the ancient Greek philosopher Epicurus once opined: "Wealth consists not in having great possessions, but in having few wants."
(4) Keep good friends - and good stocks
True friendship also applies to investing. Too often, as soon as an investor buys a stock, he is already planning an exit strategy, as he looks at how to dump the newly purchased stock. Of course, taking profit is not a bad thing. But simply selling a stock because we have made a quick buck misses the point about investing.
So, just like having lifelong friends, it may not be difficult to achieve extraordinary returns by buying the shares of good companies with which we are comfortable, and then to hold on to them.
(5) The best investors stay hard-headed
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.
(6) Lessons from the financial crisis
China's late paramount leader Deng Xiaoping once said: "It doesn't matter whether a cat is black or white. A cat that catches mice is a good cat." Investors should view the stock market in a similar way: It doesn't matter whether it is a bull or a bear market. As long as one makes money, it is a good market.
Investors should remember that they are putting their capital at risk when they invest in order to make money. Legendary investor Warren Buffet once summed it up as:
Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1.
(7) Tips for the novice investor
Financial advice for young & novice investors: Work hard, spend little, and invest the difference.
Dollar-cost average for your entirely life and you'll beat almost everyone who doesn't. What this means is to invest the same sum in the stock every month, or even consider buying more of it when the market is down and less when it is up. Over the long term, this will ensure that you buy low and sell high. Of course, this advice applies only if you are buying into stocks whose earning capabilities have been proven beyond the shadow of a doubt over the years.
Investing is simple but never easy. The mantra is to start early enough - and to stick to solid assets which you understand.
(8) Trump your inner miser
In order to stay the course and add to our investments over the years, we must keep up the rigorous discipline of ignoring the "noises" sent out by a stock's short-term trading patterns and the overall market trend. Part of the problem comes from the myopic focus of research reports put out by stock analysts as they chase a company's next earnings numbers.
Sure, such information is useful but what determines a company's long-term fair value is the dynamic of its earnings growth, and not the size of its short-term profits.
(9) If in doubt, sell half
There are times when a company is unloved, for whatever reason, even though it enjoys good business fundamentals. This is reflected by its depressed share price. It may take a long time before it is priced correctly. In the meantime, it can be frustrating and painful for investors who are right about the company at the wrong time.
For so many investors, it may be the tallying of votes - what other people think of the stock - that matters a lot more than the weighing machine Mr Graham talked about.
There is another analogy for investors who take much shorter view on their investments, one enunciated by another great investor, the British economist John Maynard Keynes. He described investment as a beauty contest with a difference. To guess the winner, what is important is not to select who you believe to be the most beautiful contestant but to guess at how the judges will rate the various contestants. Seen in that light, successful investing is really a lot more psychology that anything else, a process of coming to grips with your won emotions as well as others'.
Mr Goh's answer to any investor who is confronted with a dilemma over taking profit on this winning bet or cutting loss on a plunging stock, is to sell half of it. Selling half of the investment will release the psychological logjam that comes from trying to decide whether to keep the investment or get rid of it completely. He can then analyse why he bought the stock in the first place, and whether to hold the remaining shares, sell them or buy more.
(10) In investing, stick to the best companies
Legendary investment guru Warren Buffet has made the wry observation that "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact".
So, in any successful investment strategy, the key rules are: buy into only the best companies, stick to business sectors which enjoy predictable earnings and higher-than-average growth, and pay a fair price for the investment. The principles may sound simple but sticking to them is easier said than done.
(11) The case for buying Asian stocks
According to billionaire US fund manager Howard Marks: "Sometimes, emerging markets are considered to be scary and exotic places, and sometimes, they are the attractive high-growth alternative to the stagnant developed world."
The importance of making the right call on emerging markets, or any investment for that matter, is to understand that a stock price is affected in a big way by investor behavior. He said: "We want to buy when prices seem attractive. But if investors are giddy and optimism is rampant, we have to consider whether a better buying opportunity might not come along later."
Hence, the important point to bear in mind is that in good times, investors tend to chase after assets till they hit prices well beyond reason. But when a financial calamity occurs, prices tend to be depressed to unreasonable levels.
So, remember to apply caution in investing in the attractive but volatile Asian markets. While stock prices look attractive today, they may become even more attractive tomorrow if investors' sentiment sours.
(12) The attractions of dividend stocks
Investors should consider:
- The company has a business model with the cash flow to sustain further their dividend in the future. After all, a company with a solid business and a long history of making - or increasing - dividend payout is likely to stick to its track record of doing so.
- The dividend payout ratio. This is the proportion of earnings which a company pays out as dividend. As a rule, it is better to invest in companies whose dividend payout ratios do not exceed 50 percent of its earnings. This will ensure that the company has the ability to maintain the same payout, even if its business should suffer an unexpected downturn.
- A company's debt servicing ratio - the amount of cash it uses to service the interest payment on its debts. This is to ensure that the company is not borrowing heavily to pay out the dividend - a ploy that will prove unsustainable.