It’s time for confession.
And before I reveal to you if I really did attain 20% p.a. from my own portfolio & share if such a feat is realistically achievable, it is crucial to know its context. So, if anyone claims to make 20% p.a from stocks, what does it really mean? How is his returns measured and what is his investment horizon?
As I reflect, there are a few contexts to “20% p.a. in stock returns” as follows:
1. Does it mean that I could buy a stock at $1 a share and sell it at $1.20 a share after holding onto it for 12 months and I can do so repeatedly year-after-year?
The first context is about trading stocks where returns are measured as follows:
= (Sell Price – Buy Price) / Buy Price x 100%
= ($ 1.20 – $1.00) / $1.00 x 100%
Personally, I’m not a stock trader and I don’t know how to do the above. Such is a common measure of success if you are into trading. But not investing. The key difference between trading and investing is – Trading is about short-term profits from changes in stock prices. Investing is about accumulating good stocks (good businesses) for the long-term.
So if you are measuring success based on the formula above, I believe that your mindset about investing is … not investing but trading.
2. Does it mean that if I invest RM 100k in the stock market, I could grow it to as much as RM 120k after 1 year, RM 144k after 2 years, and to … RM 619k after a period of 10 years?
Let’s take Mastercard as an example. If you invested in Mastercard at US$ 50+ a share in 2012-2013, your share is now priced at US$ 376.35 today. That equates to >20% p.a. in compounded annual growth rate (CAGR) over 10 years. Now, for investors, it is important to note that the horizon is 10 years and not in months, not in 1 or 2 years. This explains why I focus on long-term ownership over stock trading gains.
Source: Google Finance
Imagine one focuses on the short-term. You would find many “instances” which may tempt you to sell off Mastercard and cut losses. For example, if you look at its 5-year stock price chart, we could find 4 main instances where its stock price had dropped by >10%.
Source: Google Finance
In essence, Mastercard’s stock price had compounded by 20+% p.a. for the past 10 years (long-term). But in the (short run), investors would face huge volatility, fluctuation and unpredictability in stock prices as it could +/- by 20-30% or even more in a short time frame.
Side Question: How do savvy investors remain steady and even buy more of the company’s shares when it suddenly falls by 20%-30% in a short period of time?
I believe “emotional stability” which is crucial to investing success requires time to develop, nurture and mature. It takes time for investors to realise that a drop in stock price is not necessarily negative. As a matter of fact, the price dip could also be viewed positively as such an event can be an opportunity to further add more of these shares in our portfolio at discounted prices.
This requires investors to “look away” from stock prices and just focus intensely on their business fundamentals and valuations. Think about it. If I’m an investor who had invested in Mastercard because of its capability to generate increasing net income in the long run, is there a need for me to dispose of it, if it delivered consistent growth in net income over the long-term?
Source: Mastercard Inc
This explains why I choose to focus on the business fundamentals of stocks. The focus on stocks’ income-generating abilities is what offers me the confidence to hold onto my stocks despite short-term price volatilities and to occasionally add these stocks into my portfolio (if they are undervalued).
So, the context of “20% p.a.” is that – Yes, it’s possible to achieve this feat, when you invested in fundamentally solid stocks which compounded its net profits by 20% p.a. for the long-term (10 years). But, in doing so, the price to such a feat is short-term price volatility (months or 1-2 years).
Hence, are you willing to pay such a price?
If you can manage “short-term price volatility” effectively, it is more probable in your case to attain such “20% p.a.” feat in long-term stock returns like what had been achieved by Warren Buffett and Charlie Munger. Otherwise, if you are one of those who react to adverse price movements in the short run (1-2 years), the chances of you obtaining such “20% p.a.” feat is slim to none.
3. Did I attain 20% p.a. from my stock portfolio?
As I write, I have a 6-figure portfolio that consists of 15 stocks. While I now earn regular dividends (cash returns) from all of them, I did not attain capital growth from all of these stocks. Presently, I own stocks which have appreciated in stock prices and as well as depreciated in stock prices. Also, there are times when my stocks that appreciated in stock prices have fallen acutely, turning appreciations into depreciations, before recovering back to appreciations.
As discussed, stock prices are volatile in the short-term.
So, I would say that I had made >20% in total returns for some stocks today, but not from every single stock I invested. That’s reality. However, I believe it is vital to add that my bigger gain stocks are invested in recent years over a time when I was new and starting out as an investor. Although I made small gains or losses, these earlier investments have contributed to the development and maturity of my mindset, skills and experiences as an investor.
Conclusion: Can you make 20% p.a. from stock investing?
The answer depends largely on how knowledgeable you are as an investor.
So, if you have a 6-or-7 figure portfolio that had taken you >3 years to build, the chances of you attaining better returns are higher. However, if you are a newbie in stock investing, it is impractical to expect 20% p.a. in returns for you may lack the necessary knowledge, experience and maturity to build a portfolio. As such, it would be best for newbies to take 2-3 years to focus on:
- Adopting the right investment mindset.
- Acquiring skills: accounting, valuation and portfolio management.
- Gaining experiences and emotional maturity
The 3 mentioned above would enhance your chances to:
- Invest in better quality stocks at better prices.
- Reduce unnecessary investment mistakes.
So, if you wish to take your investment skills to the next level:
But, if you are already pretty solid with investing and want to build a Growth-based Portfolio filled with the top 1% companies listed in the United States, check out our free 1-Hour online webinar training on growth investing:
Online Training: Case Study of 1 Actual Stock that I had Invested in and Why It Doesn’t Take High Risk to Generate High Returns in the Stock Market?