I notice that most laymen try to follow the Warren Buffett approach.
The Warren Buffett approach to investing is time consuming and requires a lot of hard-work and not to mention a very high IQ. Nobody will admit that they have an average IQ, everyone thinks that their IQ is higher than average – then who is average?
There lies the danger – ourselves! In investing, we take heed of the wise words of Pogo: “I have found the enemy, and it is us!”
Why we cannot invest like Warren Buffett
We cannot invest like Buffett, or all the other gurus.
We have got kids to fetch, careers to take care of, the MBA project to do, the required exercise to do to fight the 3 diseases of civilization (hypertension, diabetes and cholesterol) and frankly, most of us are just plain tired from living and excelling in this tiny, crowded and noisy island.
How should time-challenged layment investors…invest:
Let me give you an approach that works.
I cannot prove that it will work in the future – I have used it for myself for the last 15 years, both for myself and in my career as a fund manager, and I have observed from value investing colleagues in both Singapore and overseas – and it works. Of course, I have adapted and modified it for the layman investor here, such that albeit its simplicity, it still works.
The overall plan is simple:
First, save as much money as you can.
Cut all unnecessary expenses. For example, don’t drink lattes, drink water. Don’t drive -walk or cycle. Don’t eat out, cook at home. Save every cent.
With your savings, go and buy a stock. If it is not enough, save another 2-3 months. Buy equal dollar amounts every period regularly.
Which stock to buy?
Don’t listen to your broker, friends or troll the internet for stock ideas. Doing that will guarantee you will fail in a spectacular manner.
Stock ideas must be generated independently. That is the secret of success. Learn how to use a stock-screener.
Just run it and choose stocks that are selling below book value and have been paying dividends for the last 5 years.
Choose any one that strikes your fancy – and buy it! Only look at it when it has gone up by 50%. (Usually, it won’t happen in a day or week or month or year). If you cannot wait, you don’t deserve to be rich.
You can then decide to sell it or hold it, it really doesn’t matter. Don’t ask me when to sell – it is more important that you have bought it. If it goes down, ignore it. If you sell it, use the money to buy another stock.
Repeat this step every time you got spare cash. Do not buy the same stock. Make sure each time it is a different stock.
Remember Noah’s ark – a pair of each animal? Just do that. Diversification will protect you against yourself.
If you do this monthly, at the end of 5 years, you should have about 60 stocks in your portfolio, and the capital gains would be a tidy sum, not counting all the dividends. Reinvest your dividends – it is not free money for shopping. Aim to have about 100 stocks in your portfolio, with each one having equal weightage of 1% each.
Warnings for the Layman Investor
- Beware of stock market euphoria.When the market is euphoric – do not suddenly pump in large amounts of money into stocks. 99% of the people do this. Our egos will be inflated, because we have been diligently accumulating stocks and seeing their market values rise stratospherically, and all our self-congratulations will spur us to add in more money. Don’t! Stick to the plan.
- If the stock market plunges by more than 50% (eg. the financial crisis in 2008) – do not sell your decimated stocks, just hold on, take a deep breath, and keep adding. Stick to the plan.
When to stop? When your dividend income from your portfolio can fund your expenses – then you have earned your retirement!