Holding the course: investing for the long-term

This is one of the toughest challenges facing us in our journey towards financial freedom. The ability to buy and HOLD and not to be tempted by what is happening in the markets to sell either to cut loss or take profit.

Equities have a role to play in our investment portfolio
Stocks and shares (or equities) have a role to play in our financial freedom journey. If you have an interest in general knowledge, about business and companies performance and are able to understand basic economics and how it works in the real world, investing in equities is one way to grow your money if you take a measured, responsible approach to it. Punting or speculating on share fluctuations on a hourly, daily, weekly or monthly basis is NOT investing.

Even I get caught up in share speculation. I have done my share of buying stocks in companies in anticipation that by tomorrow, next week, next month, the price will go UP without fully understanding my reasons for picking up those stocks. Suffice to say, I also pay my due of tuition fees to Mr. Market in terms of losses on sale of such stocks.

However, the more I invest in the stock market, the more I realise that buying and holding quality blue-chip companies is still a strategy that works for me. It may not work for everyone since your style of investment and your tolerance to risk would be different from me.

Here are some of my stock pick considerations in no order of merit. They are simply factors I consider before I make my decision to buy.

1) Profitability and Dividends
This goes without saying but you'd be surprised at how valuations of companies as reflected by stock prices during the dot-com days of the late 90s and 2000s sky-rocketed even when the companies were losing money year after year! When you buy a share, you are buying a part of the company because you want to participate in its profits and not its losses. But as a shareholder, you are exposed to both and hence you have to pick and chose those companies with a proven profit record and who pay you dividends. That is what I look out for.

2) Long-term business prospects
This is more subjective because your assessment about the company's future is as good as mine and as good as the man-in-the street. No-one can predict the future, but we can have some idea on the overall prospects for a company that we understand based on available information now.

I typically like blue-chip companies with monopolies in Singapore as they are in a very strong competitive position and are a price maker and not a price taker. They tend to be big and are able to reap economies of scale. Currently I have Comfort-Delgro, SPH and SPC in my portfolio that meet this criteria.

3) Price
There are many companies that satisfy my first 2 criteria but they are expensive to buy relative to their earnings and prospects. This is where a lot of judgement is involved because everyone wants to buy low and everyone wants to sell high. No-one wants to sell low and buy high. So how do you decide if the price is what you are willing to pay given the available information about the company and its prospects?

I use dividend yield as a gauge. Since most of my counters pay dividends, I typically would only buy at a price where their dividend yield beats treasury bills or fixed deposits returns of 2%. If the company is unable to do so at the price its shares are trading, I will buy the company IF I am bullish about its prospects or think that the general market sentiment is bullish and will buy. But this is risky because if market sentiment changes, which it does very quickly, you can get stuck in counters that pay low dividends (worst than fixed deposits/treasury bills) and yet you face paper capital losses if the share price goes down a lot.

Holding power and patience
The ability to beat inflation by investing in equities takes holding power and patience. Holding power is important as it makes you less susceptible to market sentiment, i.e when market is bearish, you sell (worst time!) or when market is bullish you buy (also can be bad). You tend to invest based on your investment principles and make choices more in line with your investment philosophy. Patience is also important. I learn from stockmarket forums that the market is always there for us, so it is important not to risk all your investible savings at the roll of the dice and take a measured and balanced approach to investing. I continue to keep 10-20% of my investible savings in fixed deposits and/or treasury bills and cash equivalents. I generally do not use contra or margin to invest and hence can ride out short-term market volatility.

Investing is an art and not a science, but I believe that all of us can do better than what we are achieving now with our portfolios prudently using a measured approach that takes into consideration our skills, abilities, risk tolerance and investment objectives.

Be well and prosper!