How To Make 20% Compounded Return By Yourself Without Being a Guru? Your Complete "Do It Yourself" Investment Game Plan.
Apr 11th, 2008 Posted in Intelligent Investing
After reading 20+ books on stock investing, I still don’t know how to analyst a company! And to finish reading those books, it took me a whole year. So many books, so much time, yet so little gained.
Everything that I have learned can be summarized into 1 sentence, “Buy wonderful businesses at discounted price.” That’s the whole strategy of value investing. That’s what those books trying to tell me.
The biggest gain from reading those books is actually to realize that it is impossible to do it myself. It is impossible for me to read 10 years annual reports for just a single company to find out if it is a wonderful business. It is very boring for me to dig deep into the income statements and balance sheets to calculate the intrinsic value of the company so I can figure out if it is selling at a discount.
The problem is not that we don’t spend enough time and effort on it! The problem is that investing is an art and not an exact science. The sentence, “Buy wonderful businesses at discounted price” make a lot of sense, but implementing it is a very very tough job. It is like you also know your should not get angry easily but you rant all the time when are you inside your car and press your car horn just because the car in front didn’t move after 0.01 second after the light goes green. You know it, but it is hard to be done. You also know that you should exercise more to get healthy but when it is time to go exercise, you say “tomorrow lar, today very tired”. You know it, but it is hard to be done.
What are wonderful businesses? What price is undervalue and what price is overvalue?
I don’t mind spending time reading 10 annual reports for a company if after that I can figure out if it is a wonderful business. I also don’t mind spending 10 hours reading all income statements and balance sheet if I can figure out its intrinsic value.
But it didn’t work like that! After reading 10 annual reports doesn’t mean you will know if it is wonderful. Spending 10 hours to get an ‘intrinsic value’ doesn’t mean it is an accurate one and you can make money from it! There is no guarantee that the effort and time you put in will give you the results you want, because deciding whether a company is wonderful and finding its intrinsic value is an ART and not a SCIENCE!
10 different guys reading the same 10 annual reports can come out with 10 totally different conclusions on whether it is a good company or a bad company. 100 different guys trying to calculate its intrinsic value and they can get 100 different answers. There is no exact answer! You will only know who is right and wrong after years has passed and the future performance of the company and its stock price becomes history.
The best you can do about the future is to predict it. Prediction is an art!
I love money. But I am not really passionate about stocks. I just love its compounding power, but I feel boring reading annual reports and income statements. It is simply not my cup of tea! I have a lot of other interests, passions and hobbies. I am interested in learning and doing a lot of things but I really don’t want to be an investing guru (or a politician)! I am passionate about heath, I am passionate about my spiritual practice, I am passionate on talking cock, but I am not really passionate on picking stocks!
If you look at all investor gurus, there are very passionate in investing. They spend their entire life in investing, although they say they are long term investor and they can buy a stock and hold it for 10 years without looking at it, they NEVER DO THAT! They still look at the stock market everyday, they just don’t buy and sell everyday, but they still look and still do a lot buy and sell within a year! Because it is their passion, their life. They can’t live without looking at stocks. Also, it is their job and career because they make money by investing for others.
But it is definitely not my passion. It is also not my job and my career. I feel stressed with stock. The less I look at it, the more happy I am. So, why spend so much time on it? But I realized that the best way to compound my money is to use stocks! So what should I do?
“To be happy, you need to find someone who loves to do what you hate to do, and can do it a lot better than you.”
This is the key concept of this post, and the key strategy of how I compound my money, how I do my stock investing.
Instead of going to research and pick my own stocks, I actually went to research and pick my own fund managers! I want to find someone that is good at doing what I hate to do!
4 of my favorite investors are Warren Buffet, Mohnish Pabrai, Peter Lynch and Tan Teng Boo. Every value investor loves Warren Buffet. He is the richest man in the world now after compounding for 50 years!
I like Mohnish Pabrai because he has proved that low risk high return value investing works! He started his investing business in 1999 which is quickly followed by the dot com bubble. And yet, not only that he is not affected by the market downfall but he actually deliver an outstanding performance where he manage to obtain 28% compounded return until today! If you study him and look at his strategy, he is so conservative with his investment, making his invertors able to sleep soundly at night.
The chart below shows the severity of the dot com bubble where the NASDAQ Stock Market has plunged sharply from the peak of 5,000 points in the end of 1999 to only 1,100 points in the end of 2002! That means if you have $5,000 at the peak, you are left with $1,100 after ‘negative compounding’ for 3 years. And yet, Mohnish Pabrai, a strict value investor, made 28% compounded return from 1999 until today!
Peter Lynch is the best mutual fund manager in the world. Yep, I condemn mutual fund a lot but Peter Lynch is actually one of the very rare distinct fund manager out there. While owning lots of stocks in his mutual fund, he achieved an outstanding 29.2% compounded return for 13 years! What he did is simple, “Buying wonderful businesses at discounted price”. But different than other gurus, he made it by buying hundreds of wonderful businesses. For comparison, Warren Buffet, the richest investor and richest man in the world, only owns around 60 stocks.
You should have heard of Tan Teng Boo if you have read about my ICAP post. He is one of the best brains in Malaysia which luckily our lousy government haven’t exported to Singapore. I have seen him spoke a few times. The first time is already 4 years ago when I attended a seminar organized by him. When it comes to money, you won’t be confidence with a person by just someone ‘recommend’ him to you, like what I am doing right now. You must listen to him speak yourself. Listen to how he answers the questions throw to him. There are many videos of his interview in his website here. Watch yourself.
I decided not to invest with Warren Buffet’s Berkshire Harthaway because I know it is very hard to invest billions of cash and get spectacular returns. Warren Buffets has been compounding his money for 50 years until he becomes the richest man in the world, how big more can he be?
I like Mohnish Pabrai. But to invest with him you need $2 million USD. “*_* So you know why I didn’t invest with him.
I like Peter Lynch. But he is retired now.
There are just too many reasons why Tan Teng Boo is the best person for me to outsource my investing. The man that loves what I hate to do and can even do it better than me! I found my ’slave’! [I think investing is painful so doing investing job everyday look like a salve to me, but he enjoys it, so let him be. keke]
1. He is so near. A Malaysian who just live in KL. A real person that you can touch (hand & shoulder only, not butt). A real person that you can see with your own eyes (not TV or picture only). Someone who also know who is Adbullah Badawi and Hishammuddin.
2. He has a newsletter published weekly so you know what he thinks every week. And his newsletter has several paper portfolio where you can mimic his buy and sells!
3. He is the fund manager of the only closed-end fund listed in KLSE! You can let him invest for you as low as RM2.17 per share right now! [not USD 2 million]
So why do it yourself when someone can do it better for you?
I prefer to have more time myself doing things I like.
I buy my first batch of ICAP in February 2007 at RM1.54. At that time I have only read a few books on investing (not 20 yet), confidence on value investing is still very very weak. And I am also doubtful to Tan Teng Boo. Within 2 weeks, the whole market suddenly crashed when the Shanghai market fell 9% in 1 day. Being one of the panic chicken, I sold it for RM1.48 and lost money! I started scolding Tan Teng Boo as a cibai. Look at the ICAP chart below, you will see a sharp fall end of February 2007.
I can say all value investing books will have this quote by Warren Buffet.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Somehow, I remembered that later. And I actually started to buy back ICAP after the crash. I buy gradually for the next few months. In June, I become very confident and sold all my mutual funds and convert all proceeds to ICAP. The highest price I ever pay for ICAP is RM1.70. My averaged purchase price is RM1.55. I hold just 1 single stock and nothing else for a long time. No mutual funds, no blue chips, no Amanah Saham Wawasan 2020.
Lets look at 2 of the mutual funds I sold in June (I also sold my ASW2020 to my father, haha).
ING Global Real Estate Fund – Bought this in September 2006 after I failed to buy any ASW2020 after queuing for 2 hours at Maybank. So I immediately walk to Hong Leong bank to buy this fund. Bought price is RM0.5103. Today’s price RM0.3999. Investment return based on NAV if I hold it until today is -22%! But because it does pay dividends all the time, the return will be slightly better but I take note that I need to pay around 5% commission when I buy. So does buy and hold really works? Do mutual funds work?
Public Global Select Fund – Bought this on its launching period in September 2006 too. Commission is 6% with 1% free units, so net commission is 5%. Look at the chart below, it is -8% since inception and if I am still holding it until today for 18 months, my return will be -13% (8% + 5% commission). They even perform poorer that the market (red line)! What is the need to pay 6% commission and 1.5% annual management fee to the fund companies when they can’t even do better than the overall market?
Luckily I didn’t hold any mutual funds anymore. Because another important thing that I have learned from reading those investment books is -