Lately, I bought a copy of ‘The Psychology of Money’ after getting to know of its existence from a YouTube video published by the Fifth Person in Singapore. This book discusses many emotional aspects that would influence how we make our financial decisions and hence, enabling us to better understand ourselves. Now, as I read, I find there are pointers in this book which could be directly applied in shaping us to become better stock investors. The top 5 lessons are as follows: 


Lesson 1: Getting Wealthy and Staying Wealthy are Two Different Things

The book suggests that the mindframe and skills to get wealth is vastly different from keeping wealth. The first requires an element of risk taking. The latter one avoids risks and is driven by a ‘survival’ mentality. So, in the context of investing in the stock market, I would say that a person who intends to get wealthy in the stock market would invest differently from another who plans to keep wealth in stocks. 

For instance, a person who wants to get wealth in the stock market may tend to emphasize more on ‘returns’ when buying or selling stocks. Hence, it is possible for him to trade stocks for quicker profits or to buy stocks with leverage such as margins and CFDs. In general, the focus is on how much money they could earn potentially from their stock trades or investments. 

Meanwhile, a person who intends to stay wealthy would put great emphasis on the business sustainability of a stock before investing. This is because his plan is to hold onto stocks for the long-term. Instead of hallucinating how much profits or returns a stock could bring, he would focus on mitigating his downsides from buying the stock. This would involve him assessing the stock’s financial strength and valuation prior to deciding on a stock investment. 


Thus, the difference lies in: 

One is about: ‘How much returns could I gain from this stock?’ 
The other is about: ‘How safe and sustainable are the businesses of this stock?’ 


Lesson 2: High Savings Rate Can Compensate High Investment Returns

Let’s say we have Mr. A and Mr. B. Both earn RM 10,000 a month in income. 

Mr. A saves RM 5,000 or 50% of his monthly income. In a year, he would save as much as RM 60,000 in capital. Let’s assume that Mr. A is an average investor. He could earn a consistent return of 5% per annum from his investments. Thus, for Mr. A, if he invests the RM 60,000 in capital, he could make RM 3,000 in returns per annum. 

But, what if Mr. B is one who saves RM 1,000 or 10% of his monthly income? As for him, what is the investment return that he should aim for if he wishes to get the same RM 3,000 in annual returns from investing RM 12,000, which is 1 year worth of his savings? 

The answer is 25% per annum. 


So, based on this example, which of the two do you think is easier to achieve? 

Is it to achieve a consistent savings rate of 50% from your monthly income? 
Or, is it to achieve a consistent return of 25% a year from your investments? 


Hence, here is the lesson: 
An average investor can still build wealth if he has a high savings rate. 


Lesson 3: Include ‘Room for Error’ When Building a Stock Portfolio 

To-date, I have made some notable buys that pay excellent dividends and are in capital gain positions. They include DBS, OCBC and a list of Singapore REITs that were bought at discounted prices. Presently, I view them as my ‘glorious buys’. 

But with that being said, you would not find me investing all my life savings into these stocks, regardless of how much conviction I have in them all. Why? This is because I acknowledge that I’m human, I have made mistakes and I might make mistakes in my next investments. As such, I believe it is crucial for me to include ‘Room for Error’ when building my stock portfolio. 


One of the measures taken is by asking myself this question: 
‘What is the impact to my net worth if the price of my stock falls by 50%?’ 


For instance, if a person invests RM 10,000 into a stock and his stock drops 50% after purchasing it to RM 5,000, I would say that the person can be less affected emotionally if his original net worth was around RM 1 million before making his investment. 


Lesson 4: Stick To Your Own Investment Plan 

This talks about the importance of recognizing that we are different individuals, thus, will invest differently as we have different needs, wants, and characters. It is crucial to take note that two individuals might buy the same stock at different prices for different reasons. 

For instance, I’m a dividend investor who intends to keep wealth via amassing a portfolio of fundamentally-solid dividend-yielding stocks for the long-term. So, I build my investment plan, comprising my stock selection criteria, valuation, and risk management practices based on my objectives. 

Along the way, I may find some good quality stocks. However, I would not make a major investment in them as they do not fit into my plan. I think it is crucial to know what is suitable for you and what is not before you invest. Because of this rigidity in plan, I may not enjoy a crazy 3, 5 or 10-bagger return from my stocks. But, that is okay as I’m content with my dividends, which I plan to increase on a yearly basis. 

So, the bottom line is this: 
If you are an investor, stick to investing. Don’t trade or speculate. 


Lesson 5: Freedom is the Highest Dividend that Money Pays 

Yes, I agree. 

More so, I would say that a little more dividends is a little more freedom, which offers more choices as to what, how, and where I may choose to use my money. Unlike capital gains, which have its place, I could choose to use dividends to pay bills, to treat meals, to fund a vacation, to donate or even to reinvest them for a lot more dividends. I like receiving dividend income. It is a lot of fun. 

Some opine that a 4%-5% dividend yield is too slow. 

That is okay. For me, I don’t mind ‘slow’ as long as the yields are sustainable. As I reflect back, yes, the dividends I’ve received in my early days of investing were little. But, it could buy me, maybe a bowl of Cendol or two every now and then, and the happiness that brought from a dividend-paid Cendol was ‘priceless’. 

Of course, that happiness can be expanded over time to movie tickets, bowling, streams of cuti-cuti Malaysia trips, and much more. How much is their price tag and how do we measure the investment returns that were brought forth from a list of pleasurable activities that you can be involved in as a result of you having a consistent stream of dividend income? 

Essentially, I would say investing for dividends is investing for freedom. 


Conclusion: 

Obviously, there are a lot more lessons to be discovered from this book. I would highly recommend all to have a copy for leisure reading as I’ve personally found the materials to be an eye-opener and I’m positive that you would find it too. In closing, I would like to encourage all of us to journey along as we move towards becoming better investors and ultimately, achieving financial independence. 

Once again, here is the link to getting the book from Kinokuniya Malaysia: 

Link: The Psychology of Money


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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