I have decided to start the Young Investor Series to encourage and educate more young students and adults to invest in stock because I have believed in the merits of starting young. While I am obviously way too inexperienced, it has been a very meaningful journey for me thus far especially since I started my journey at this time of uncertainty and turbulence. In fact, I believed that I have learned much more than I will have from having started in this current mild bear market. From getting very excited at how the price tick when I first began, I will only get as excited now when I discover a company of great fundamental.
The first reason why you should invest in the stockmarket is that while cash is king, it is never wise to have 100% of your wealth in cash (other than possibly waiting for the next huge financial crisis) because cash has proven to be a depreciating asset due to inflation. Inflation results in the erosion of wealth as the price of goods increases but your cash remain the same. Your 50 dollars note will only provide you with $50 of value next year even if your chicken rice costs you an additional 50 cents. Average inflation has been around 3.5% for the last 100 years, this may seemed little but in fact it is very scary if you will to compound the 3.5%. Using the rule of 72, your wealth will be depleted by 10% every 3 years and half every 20 years. The total amount of inflation from 1913 to 2006 is at a staggering 1929%. Neither should you expect the inflation trend to discontinue as it was only during the Great Depression of the 1930s that you have a long period of deflation.
On the other hand, stockmarket has generated an average of 9% return over 100 years. The key is 100 years, which means such a return is likely only if one invest with a long term outlook. Thus, it is wise to have some of your wealth invested in stockmarket be it directly or indirectly through some form of stock mutual fund or ETF. The stockmarket has over the long term be able to deliver a return that way exceed the inflation rate. One need not put all its wealth into it in order to combat inflation as putting 30% of it in stockmarket will be sufficient to avoid erosion of wealth. This is especially true in Singapore where our bank pays a meagre amount of 0.125% interest on deposits. For every $1000 that you have, the bank will pay you $1.25 yearly.
While many might have heard stories of people going bankrupt from PLAYING with the stockmarket, one can choose to be a passive and defensive investor which does not requires much of your time and effort to be.
In conclusion, one's wealth will be drop by an average of 3.5% yearly if one does not take any action to protect it. Part 2 will be on the magic of compounding interest and why the younger you are the better a magician you are.
What is your capital size?
ReplyDeletemy capital size is at the lower range of 5 digits, mostly from my NS savings.
ReplyDeleteyou sure anot? NS can save 5 digits? You must be some wayang ocifer.
DeleteI am a 3rd sgt. how much u save depends on how much you spend :)
DeleteHi,
ReplyDeleteI liked your analysis of Vicom. Well done. Still considering whether to buy or not because its P/E is on the high side.
Singapore may be a growing and dynamic economy, but our local companies tend to be small caps or large-caps with little or no moats. Have you considered looking at overseas shares?
One unloved company with good fundamentals and relatively palatable pricing right now is Microsoft. Great margins, ROE, ROA, tons of FCF, EPS growth, consistent profits over past 5 years, strong balance sheet. Their business model still looks robust, although tweaking is needed to adapt to a changing world.
One downside is FX risk for investing in a USD stock. Another is the emergence of smartphones and tablets, and the competing companies that come along with them.
I do agree with you that the PE is slightly on the high side as I bought it last september when it was much lower. Anyway, when you talked about moat, it is not neccessary a monopoly. It can be a very well run or being the lowest cost producer or delivering a niche service.
DeleteI did consider looking a overseas share though, and yes Microsoft is my first choice. I has been looking at it since it was at $25 but now it has risen by 10%. I do plan to publish a research on Microsoft in the long run. However, this research will be a really huge one considering that Microsoft has a market cap US250 billion with so many different sectors from office to live, entertainment to server. Thus this will take me months to do it.
In the case of Microsoft, its moat is not simply just in its Office and OS. If anyone has realised, Microsoft has always been much better at innovating from other's product, rather than creating its own product. The greater power of Microsoft lies in the success of its office and OS that give it such a massive cash hoard and time to wait for its opponent to commit a mistake and get eliminated, even if it will take them years. For e.g. Wordperfect, OS/2 and Netscape.
So let's think about it, not too long ago when Apple was so hot and Iphone seemed to be the "in", everyone will have believed that time's up for Microsoft. Currently, Andriod accounts for 50% of the smartphone market and Microsoft has managed to sign license agreement with 10 of Andriod manufacturers accounting for more than 50% of Andriod devices market last October. Recently, Microsoft announced partnership with Nokia to sell Window phone.
This is why I have such a strong faith in Microsoft
i like someone having faith in MSFT but really they made a lot of bad moves. still i think they are competing with Oracle on enterprise, apple at OS and no one at office.
Deletesome think windows phone can overtake iphone in 2015. i am skeptical but i do see really really synergistic things coming out of msft windows 8
it's indeed true that Microsoft has made a lot of bad moves, that's undeniable. but then again, how many enterprise can survive and continue growing its profit despite of all its many mistakes. In term of OS, its market share is still very high and a clear market leader.
Deletewhether window phone can overtake iphone is something unknown and not worth speculating, but its licensing agreement with android device maker together with the fact that android account for half of total smartphone market is something significant.
Though personally I am a fan of itouch and iphone, I am very clear on the fact that Microsoft is what I need whereas Apple is only something that I want.
It's just like I will always need to drink plain water, but my preference for pearl milk tea can change easily if a better alternative appears.