SmallChange

Pick stocks the way you choose your friends

Find good ones, stick by them, and you could end up richer in every sense of the word

On Facebook, some people seem to want to accumulate friends the way others collect ticket stubs from their favourite movies.

I suppose it might be fun or perhaps good for the ego to appear to have so many friends. This is no doubt the reason that some of these people go so far as to send friend requests to friends of their friends.

But you have to ask: How many of these so-called friends can they really regard as genuine friends?

You can't really put a price on true friendship. If you can find even a handful of soulmates with whom to share your passage through life, you can consider yourself truly blessed.

(For readers wondering what all this has to do with investing, please bear with me.)


(From left) The writer with his friends Richard Hale, Frank Chiew and Lawrence Chang at the Yellow Mountains in central China in November last year. Enduring friendships like theirs take time to develop, he says. Similarly, investors ought to go for trusty blue chips and take a long-term approach. ST PHOTO: GOH ENG YEOW

The great philosopher St Thomas Aquinas once observed that there is nothing on this earth to be prized more highly than true friendship. Without friends to share our joys, even the most agreeable pursuits would become tedious.

In November last year, I joined three old friends for a week-long holiday to enjoy the autumn colours at the famous Yellow Mountains (or Huangshan in Chinese) in central China. I have known two of them - Lawrence Chang and Frank Chiew - for more than a decade.

Early on in life, I realised that achieving success in investments is akin to finding good, lifelong friends. What an investor ought to do is to find a few trusty blue chips and rely on the magic of compounding to maximise the returns he can get from them.

I got to know the third, Richard Hale, almost 30 years ago as a rookie reporter when he was the top honcho of the HSBC operations here.

It still amazes me sometimes that we have been friends for so long, despite our disparate backgrounds. There in the vastness of Huangshan's mountains, the years fell away as we regaled one another with stories of our lives in a warm little cafe as nightfall closed in. Outside, it was cold and dark. It was "very heaven", to borrow a phrase from the English poet William Wordsworth.

In this modern fast-paced world, it is difficult to find such enduring friendships any more. Too often, we tend to take those we regard as friends for granted. We become too busy to find out how they are doing, and, after a while, lose touch with them. In the end, what pass for friends are the near-anonymous characters who put "likes" on your Facebook page. But these are not people, for the most part, with whom we would like to share our life's greatest moments. They are also unlikely to be the people we reach out to when we are in a spot of trouble.

Early on in life, I realised that achieving success in investments is akin to finding good, lifelong friends. What an investor ought to do is to find a few trusty blue chips and rely on the magic of compounding to maximise the returns he can get from them.

And rather than succumb to the urge to do something every time the airwaves shriek about the latest calamity to hit the market, our strategy should be to stay calm and do nothing about the portfolio of blue chips that we hold.

This may run contrary to everything you have been taught about mainstream investing - which often encourages an investor to treat shares as a financial wager rather than as an asset offering ownership in something solid like a company business.

Part of the problem stems from the fact that we get lots of research reports put out by stock analysts that give "buy" or "sell" calls on stocks as they chase a company's next earnings numbers. Sure, such information is useful but what determines a company's long-term value is the dynamics of its earnings growth, and not the size of its short-term profits.

And having identified the stocks we want to keep for the long term, we should adopt a "dollar-averaging" approach and make regular purchases of them over time.

For the uninitiated, dollar averaging is investing a set sum on a regular basis, regardless of the share price. So when the share price is low, you would buy more shares, and when it is high, you would buy fewer.

That is easier said than done for most of us. It takes a lot of discipline to stay the course, given the "noise" sent out by a stock's short-term trading pattern and the overall market trend.

Just as I find little value in having lots of near-anonymous characters as friends on my Facebook page, I find that holding too many stocks at the same time can lead to mediocre returns because I may find myself with exposure to lots of stocks about which I know next to nothing.

Legendary investment guru Warren Buffett once told graduating college students that one way to improve their financial welfare is to give themselves a ticket with only 20 slots so that they would have only 20 punches which would represent all the investments they would make in a lifetime.

What he means is that each time we buy shares in a new company, our card gets punched once. After the card is punched 20 times, we cannot make any more stock investments.

Under those guidelines, Mr Buffett argued, a person would have to think carefully about what he is going to invest in before he finally loads up on those investments. This would ensure that he makes a better investment decision.

Ask yourself: If you are able to make only 20 investment decisions in a lifetime, how many of your current stock holdings would make the grade? And if you have more than 20 stocks now, which are the ones that you would axe?

Adopting this approach will ensure that we value each and every stock transaction we make, and this will also help us to get rid of the "aim, ready, fire" approach many of us adopt on our investments.

In my case, I hold far fewer than the limit of 20 stocks recommended by Mr Buffett. My Supplementary Retirement Scheme account, for instance, holds only five stocks - the three local banks, commodities giant Wilmar International and beverage firm Fraser & Neave - and they have provided me with solid returns in the past decade.

The bulk of my stock investments in my CDP account are just on two stocks - ComfortDelGro and Tan Chong International. The dividends paid by both counters over the years have more than covered my initial investment outlay.

Some contend that we should not fall in love with our stocks and that we should regularly monitor our investment portfolio.

But isn't this exactly what Mr Buffett is advocating?

If you are forced to own just a few stocks, you will think very carefully about the ones you would like to hold. Maintaining blind faith in a stock when it no longer has the allure that attracted you to it in the first place can only lead to grief.

That is one reason we should limit our attention to only a few stocks at a time because we will then be able to better track how they are doing. Our brains are simply not wired to process information on many companies at the same time - this can lead us to make bad investment decisions.

Just as having a few enduring friendships beats having all those near-anonymous characters you want to be "friends" with on your Facebook page, choosing your stocks carefully and sticking to them can turn out to be a great investment strategy. It may make you richer in every sense of the word.

A version of this article appeared in the print edition of The Sunday Times on December 04, 2016, with the headline 'Pick stocks the way you choose your friends'. Print Edition | Subscribe