Tips for a novice investor

-- ST ILLUSTRATION: ADAM LEE
-- ST ILLUSTRATION: ADAM LEE

Top of the list is dollar-cost averaging, which will ensure that you buy low and sell high

My nephew and two of my nieces are taking their university final examinations.

They already have jobs waiting for them when they graduate, and I wish them every success in getting top grades.

As I watched them chattering about their future jobs and the freedom that comes from earning some serious money, it reminded me of when I finished college and started on my work-life journey nearly 30 years ago.

For many people, the happiest phase of life is being in school, though the over-riding worry is to pass examinations.

But while working life has its highs and lows, and a lot of in-betweens, I am sure many of us in the later stages of our careers would say we are happy and satisfied with how our life stories have turned out, even though it might be quite different from what we expected when we started out.

So what financial advice would I offer my nephew and nieces? I can sum up it up in one sentence: Work hard, spend little, and invest the difference.

For most people, the concept of earning a living means getting a salary. Yet, that is not how wealth is accumulated by most people.

In my parents' generation and in mine, most people get the bulk of their wealth from the appreciation in the value of their home.

One good example would be my old friend, Mrs Sim Sing Sow, who bought a house in Siglap for $30,000 about 50 years ago. It is now worth millions.

Some have also been able to prosper from making wise wagers in the stock market, gaining financial independence along the way.

Recently, I told my colleague Jonathan Kwok that my 86-year-old father has held only three stocks - British American Tobacco Malaysia, United Overseas Bank and Sime Darby - through the decades and that if I had stuck to my father's stock picks, I would be a rich man.

Now, Jonathan has a curious mind and he went to check out my observation. He found that since the mid-1980s, when I started working, UOB and BAT(M) have both jumped eightfold in price. Even Sime Darby, which I considered to be a laggard performer, was up four times in value.

But Jonathan thought that the flaw in my investment strategy was in diversifying my investment portfolio too much. That was not the case. The problem was that both my father and I failed to buy more of the same counters over the years because their prices had risen way above our initial costs.

So I agree fully with US financial portal Motley Fool for placing this tip right at the top of its advice to novice investors: Dollar-cost average for your entire 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 benefit of a doubt over the years.

Many people will pooh-pooh the example I use as an outlier from a bygone era unlikely to be repeated in this age when algo traders can flood the trading system with millions of their orders at the blink of an eyelid. But I have another example.

Four years ago, in a column headlined "Boom or bust - watch your every step" (The Straits Times, May 24, 2010), I observed that even though European stocks had plunged to levels even lower than during the 2008 global financial crisis, big fund managers continued to cut their exposure in Europe.

I wrote: "You may feel that a stock has a solid business and excellent fundamentals, and that its price has fallen to attractive levels. But the sad European experience shows that when sentiment turns bearish, no investor wants to touch any stock, no matter how far its price has plunged.''

Right after that, I bought some shares in Banco Santander - a Spanish lender with a rock-solid business that had been billed as the euro zone's biggest bank. It rewarded my faith by plunging by a further 25 per cent in price, as Spain, where it is headquartered, developed difficulties in raising money to balance its books.

But like the "buy and hold" investor that I have always been, I did nothing further and went on with my life after leaving the shares in the brokerage's custody. Recently, I took another look and I was pleasantly surprised to find that the value of the investment had risen by one-third from my cost of investment.

I had elected to collect the dividend declared by Santander in the form of shares and this has increased the number of shares in the investment by 20 per cent, which helps to accentuate my gains as its share price rebounds.

For me, it is a good example of the magic of compounding, which financial experts often talk about. But if I had adopted the dollar-cost-averaging approach as Santander's share price fell, I would have reaped a much bigger gain.

It is for this reason that I always advise novice investors never to be disheartened if they encounter some setbacks. Investing is simple but never easy. The mantra is to start early enough - and stick to solid assets which you understand.

engyeow@sph.com.sg