Is it OK to underperform the market?

Some mutual funds require fund managers to stay fully invested. Sometimes, large investors in a specific fund stipulate that the fund avoid holding cash.

Mr. Will Browne, a manager of Tweedy, Browne Global Value Fund whose fund holds nearly 17% cash said he pushes hard against such demands.

He prefers to buy companies at prices that are lower than what an informed buyer would pay in an acquisition. If he cannot find them, he is prepared to lag behind market returns for a while.

Source:
The Business Times, 9 Oct 13, page 36

Sounds familiar?

"In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued."

Source:
$15,000 passive income. To pursue or be pursued?

It is OK to underperform the market in the short term. Don't feel compelled to put all our money to work here and now. It is more important that we have the resources to load up on undervalued stocks as and when they appear in future.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” Benjamin Graham. In the long run, the true value of a stock will be reflected in its price. Don't be too bothered with the short run. The long run is what really counts.

Related posts:
1. When to be fully invested in the stock market?
2. Little Book of Value Investing.

Interview with Matthew Seah (Part 2): Value Investing.

I prefer to have a more direct control over my money rather than letting a third party invest for me which usually results in subpar to market returns after fees are paid anyway.

So, although I invest in ETFs, I only invest in passive ETFs like S&P500 ETF and STI ETF where the returns are very similar to returns of the S&P500 and STI, respectively.

My investment approach when it comes to stocks is to pay attention to 3 Rs:

Right model
Right management
Right value

Investing in businesses which have all the 3 Rs has been very rewarding for me.

If you have guessed that I am a value investor, you are right.

Value Investing has been proven to be the best investing method, as can be seen with the phenomenal growth of Berkshire Hathaway, Warren Buffett's company.

Many people buy stocks after hearing good news about the stocks. They are just buying something which is selling at a higher price in the hope of selling it later at an even higher price, which doesn't make sense to me.




Value Investing is like shopping for stocks on sale. It would be more logical to buy stocks when they are at a discount and not when they have become pricier. This is about buying something at a price lower than its intrinsic value.

Another thing which is important to remember is to invest in companies which have some kind of competitive advantage over their peers. These companies tend to have a larger market share, and are more profitable in the long run. Therefore, they are likely to continue growing in years to come.

For someone who is new to investing, I would suggest being more cautious. What do I mean?

I tested some strategies through paper trading prior to real investing. When I started paper trading, I was more emotional and often closed my trades too early. Now, I hold on to my investments for a much longer period which has proven to be more profitable than short term trading.

Being stronger financially now also means that I am able to weather larger drawdowns to my investment portfolio without feeling too emotional. 

I will end by sharing this quotation:

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now." Warren Buffett

Related posts:
1. Warren Buffett: The greatest money maker.
2. Getting started in investing and trading.
3. Interview with Matthew Seah (Part 1): Financial Freedom.

What a visit to NTUC Fairprice could teach us about investing in stocks?

I have blogged about how to explain to sceptical family members that investing in the stock market is not the same as gambling. I have blogged about how soon should we start the next generation on investing and I have also recommended a book to this end.

These topics are evergreens. 5, 10 or 20 years later, we will still have people facing these issues, I don't doubt. To deal with these issues, it helps if we are more creative. Using examples from our daily life and using language free from financial jargon will probably see positive results.

For example, I would explain to my niece that when we see good value for money, we buy. So, seeing two 1kg packets of rolled oats selling at $6.95 instead of the usual $9.90, I bought right away. It was almost automatic. I didn't really have to think.

How sure was I that it was a good deal? Well, I probably consume more oats than the average Singaporean. I have oatmeal for breakfast everyday and sometimes for both breakfast and lunch. So, I know the price of rolled oats quite well. This is within my "circle of competence", so to speak.

Extending this example to the stock market, when prices of stocks we are familiar with or within our circle of competence fall to levels which offer good value for money, why do people hesitate to buy? Obviously, there is fear that prices could fall further. Then, what if prices did not fall further?

I blog continually about the importance of having a war chest. However, what is also important is having a reliable stream of income, passive income preferably.

If our war chest is smallish, it could get exhausted quickly. So, we will need a constant stream of income to fill it up. This is why investing for income is so relevant and, indeed, important.

Know people who think that investing in the stock market is too esoteric a subject? You might want to share AK's story about his circle of competence with packets of rolled oats which offered value for money.

Related posts:
1. Investing in the stock market is gambling!
2. If AK71 can cook, so can you!
3. At what age to start investing in stocks?
4. Let your child have fun and a head start in life.
5. Teaching young children financial literacy.

Bearish or bullish? Listen to experts?

Towards end of the year, often investors look forward to a run up in share prices. Some look forward to the Capricorn Effect which is expected to happen at the start of the new year. Could it happen again or would the mountain trekking herbivore do a disappearing act?

Personally, I am sticking to my plan of holding on to dividend generating investments and not adding unless compelling value is evident. I do not know if the bear is going to strengthen or if the bull would make a dramatic return. I definitely do not know when either scenario might happen.

There is quite a bit of pessimism and fear in the air, that we know. Whether we have hit extreme fear and pessimism, I am not so sure but people (including myself) are still looking forward to that big crash before we roll out our warchests. So, I suppose there is still some optimism and hope.

Conventional wisdom would say that when the last iota of hope has been crushed, we would see the market bottom. That would be when no one wants to talk about stocks anymore. Be savvy. Be brave. That would be when we pick up undervalued stocks with abandon although we might not talk about them. ;)

You might be interested in reading the following article for some expert opinions but I would say to anyone that it is important to have a plan in place and act upon it when the time comes. Do not get distracted by the news:

Article in CNA: Investors brace for bearish market.

Bear:
"Sani Hamid, director of wealth management at Financial Alliance, said: "What I suspect is that this market still has a bit way to go to downside before it burns itself out, which is a point of capitulation whereby everybody is just really gloomy and bearish. When the situation reaches that point, I think that's when markets will bottom."

Bull:
Mr Brice said: "Ultimately we believe that we will get that rebound and that quantitative easing in the US will happen in the first quarter of next year. And we believe eventually Europe will get its head around the problem and gradually move towards some sort of resolution. We do believe we will see progress there. In that environment we could see quite a significant risk rally."

Related post:
No change to my plan as I plan changes to my life.

Don't get carried away

I would like to share this little snippet:

Extracted from an article by
by James B. Stewart
Wednesday, September 30, 2009

As I've said before, no rally goes on forever. The tide will turn, and when it does, I suspect the overvalued stocks will be the hardest to fall. That's why I'll continue to prune my exposure to the highest-flying stocks when and if we hit another selling threshold. Cash may seem dull today, but remember what it felt like just a year ago?

I think this makes sense. Don't you think so? The rally in global equities has astounded bulls and floored the bears. However, all things will end. It's a matter of when and not if.

I usually make it a point to buy only undervalued stocks and laggards. Will I be spared the carnage when the tide turns? I doubt it. Will have to stay vigilant.