Let us look at the question again. This time, I will highlight four main words that I will like to expound upon in this write-up. They are as follow:
Over time, I realised that different people have different viewpoints on the four words above and hence, will buy and sell stocks differently from each other. So, I believe it is important for me to first share my viewpoints on the four words in order to answer the above questions accurately as a stock investor, not trader.
In the context of an investor, long-term means forever.
It refers to an intent to own an asset, be it a stock or a property, in the long run, as long as it is income or cash flow productive.
So, imagine stocks as cows.
The questions you may want to ask are:
1. Are you in the butchering business or in the dairy farming business?
2. Why do you rare or breed cows?
3. Is it for their meat or for their ability to produce milk on a regular basis?
Personally, I view myself to be a dairy farmer kind of like Dutch Lady or Fonterra when building my stock portfolio. I view my cows (stocks) from a viewpoint that is based on their ability to produce milk (profits or dividends) over their span of life. As such, butchering cows (stocks) for capital gains is not really my thing as I firmly believe that I’m in the dairy farming business.
Which of the two is a more important measure of wealth to you:
a. Is it to have more money than the next person?
b. Or, is it based on one’s recurring productivity of income or cash flow?
Which of the two is a priority for you?
You see. How you prioritize the two shall subtly determine what you do when it comes to buying and selling stocks in the stock market. Let me explain.
Let’s say, wealth is about having more money than the next person. You may be more motivated to increase your capital from $10,000 to $20,000 or more. This is because wealth, in your context, is about accumulation of more money. So, in this view, you may figure out the fastest method possible to increase money. As such, I believe this mindset will attract people to venture into stock trading.
On the flip side, if wealth is about productivity, you might view stocks, based on their ability to produce recurring and increasing income over the long term.
The first is about capital gains. The second focuses on cash flow.
The first is about one-time gains. The second focuses on recurring income.
The first is short-term as they want money fast. The second is about long-term.
Therefore, how you think will determine how you invest in the stock market.
Risk is often associated with the price fluctuation of an asset.
Let’s say, we have two stocks: Stock A and Stock B. The price for Stock A has ups and downs which are greater than Stock B and as such, be considered as higher risk or riskier. This thinking often stems from people who view wealth as having more money than the next person (Refer Point #2) and it explains why we have:
a. Stock investing is risky.
b. It takes High Risks to Make High Returns.
Personally, I would view risks from the angle of a banker for risk management is key or fundamental to the business success of a banking operation.
So, how does a banker manage risk in lending?
How is it possible for a banker to reduce the possibility of a loan default?
Answer: Credit Assessment
Think about it. If I apply for a mortgage from a bank, I would need to submit my documents (IC, SSM, tax files, bank statements … etc) to the banker.
The banker will assess my financial strength from these documents to ascertain whether or not I am creditworthy enough to be eligible for the mortgage. Thus, the banker is doing fundamental analysis on me to assess if I am their preferred stock to invest or not. If I am, they will lend the money to me.
So, the question is, ‘Did we do our credit assessment on a stock before buying?’
It is the same for all types of investments, be it real estate, unit trust funds, ETF, index funds and so on and so forth. Thus, I would say, ‘Investing is risky because the investors who invest did not do credit assessment before investing.’
With that, the final word is … stock.
What is a stock to you?
a. Is it an electronic code that fluctuates in prices every second?
b. Or, is it a business that has assets which are serving real life customers?
Remember. What you think will determine how you invest in the stock market.
If you think that a stock is an electronic code, then, you would be more inclined to trade stocks for greater capital gains fast. It is likely that you will not perform credit assessments on stocks to trade or speculate.
Rather, if you view a stock to be a business, then, it will make sense for you as a stock investor to perform a credit assessment on it before investing. The reason is simple. You want to own a portfolio of highly profitable businesses. You don’t want losers in your portfolio.
In brief, as an investor, my credit assessment on a stock would include:
a. The Business Model.
b. The 10-Year Past Financial Track Record
c. The Current Financial Strength
d. The Current or Future Initiatives to Sustain Growth
e. Valuation Ratios (P/E Ratio, P/B Ratio and Dividend Yields)
Back to the question:
‘How to achieve long-term wealth with low risk in the stock market?’
My take on this is:
1. Be a Dairy Farmer: Own stocks for as long as it is income productive.
2. Wealth: Focus on stocks’ abilities in producing income for the long term.
3. Risk: Perform credit assessments on an investment before investing.
4. Stock: I view it as a business that adds value to its customers, not just a code.
Thanks for reading this. I hope you find it useful.
If you have any questions / feedback, please post them to email@example.com.
Stay tuned for my latest next week.