To first-time investors, the stock market can be an intimidating arena to get into.
All those figures on the Singapore Exchange that keep changing every few seconds may scare some of us.
But investing in the stock markets can be fun – provided you know the rules of the game.
What does the stock market mean to you?
Do you see the stock market as a casino, perhaps? Or a reflection of the real economy?
The stock market is really what people want it to be, because it represents what people are deciding to do with their money.
Imagine a world where patient investors seek out long-term capital gains, buying businesses which they want to be owners of.
All else being equal, in an efficient capital market, the return earned by a stock is going to mirror very closely the return on equity generated by the company.
But if a majority of investors put a greater emphasis on making short-term capital gains through the stock market, it may increasingly resemble a casino – where punters are seduced by greed, succumb to fear and allow emotions to get in the way of making good investing decisions.
This results in booms and busts, which the level-headed investor can capitalise on to his or her benefit.
What is your competitive advantage?
Despite vilification by many, short-term trading can make sense, provided that the individual has a competitive advantage that most do not, such as in-depth knowledge of a specific niche area that allows fleeting opportunities to be captured.
Other schools of thought include technical analysis and quantitative strategies, to which we say, “It doesn’t matter if a cat is black or white so long as it catches mice.”
Equities keep your assets growing despite market turmoil
At Bank of Singapore, we continue to advocate a core-satellite approach to portfolio construction so that investors remain focused on long-term goals while enjoying flexibility in the meantime.
Equities is a key piece to the puzzle, and indeed history has shown that equities can be great investments over the long term, despite recessions, wars, corporate scandals and natural disasters.
An investor who invested $100 in the S&P500 30 years ago would have seen the investment grow to $2009.52 as of the end of 2017.
A similar investment in the Barclays US Aggregate Bond Index (covers the US investment grade fixed-rate bond market) would have grown to $607.22.
How should I go about investing in equities?
Different people have different investing styles, and a sensible approach would be the acquisition of higher quality operating assets with certain characteristics protecting them from competition and technological changes while at the same time allowing them to generate significant free cash flow relative to invested capital.
After identifying such assets, the investor would need to answer the question, “At what price and on what terms?”, because overpaying for a good asset still makes for a bad investment after all.
With regards to this, the Peter Lynch-inspired “Growth at a Reasonable Price” strategy could be a potential one that investors can consider, for it seeks to combine the tenets of value and growth investing into a coherent strategy.
Discounted cashflows is another valuation methodology, and the choice of method generally depends on factors such as the nature of the business (e.g. cyclical or defensive), or whether it is an asset heavy or light company.
Having made the investments, the investor would need to keep up to date with companies’ news and current affairs to see if there are subsequently any changes to the original investment thesis, and either add on to or trim holdings as and when appropriate.
Investing is fun
Ultimately, the level of involvement one has in his or her investment portfolio depends on the time available as well as the amount of interest one has in the market, global economy and current affairs.
Those who have always had an investigative streak in them can also satisfy their inner desires of uncovering ideas and facts, because after all, there is a story behind every stock.
It is just up to you to find it.Disclaimer applicable to recommendation
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