I believe “what to invest” is the most frequently asked question in investing.
Today, you could be in your 20s with a 5-figure capital or in your 50s with 6-7 figures in capital or somewhere in between, single or married, with or without kids, low or high income-earner, with a solid track record in finance and investing or totally without. All are united with a common goal to generate the “best” possible return for our $X in capital.
The question now is – What is best? What does “best” look like?
After all, what I think is “best” is probably not what you would say as “best”. Our measuring stick, by and large, would be very different from one another.
Car vs Plane?
Consider this: Which of the two transportation vehicles is the best?
Is it a plane as it carries more people, travels at speed 10X faster than a car, and is much safer? Or, is it a car as it allows us to travel to more specific places within a town or city?
At this point, it is possible that you may answer: “Oh, it really depends where you want to go and how fast you wish to be there.”. If so, that’s great. You’re shifting the focus from what a car or an aeroplane could do to the travellers’ purpose for travelling. It’s not about the features but the real objectives for choosing and using a vehicle or product.
It’s a matter of suitability.
The Tale of 2 Travellers
Consider two travellers: Mr. A and Mr. B.
Both are looking to travel from Kuala Lumpur to Bangkok for a holiday.
Mr. A wants to arrive at Bangkok in 3 hours and he is willing to pay up to RM 2k for his trip. If so, a flight to Bangkok is most suitable as a plane will fulfil his objective. Whereas for Mr. B, he is on a sabbatical and intends to explore villages, towns, and cities situated in between Kuala Lumpur and Bangkok. Mr. B wishes to enjoy Char Kuey Teow in Penang, beaches at Krabi and hang out at nice resorts along the Thai Peninsula before reaching Bangkok. In this case, it would be more suitable for Mr. B to drive.
So, the choices of vehicles are influenced by:
- Where are we today? (Kuala Lumpur)
- Where do we want to be in the future? (Bangkok)
- How soon do we want to be there? (Mr. A: Few Hours; Mr. B: Weeks / Months).
- What is the price to pay? (Mr. A: RM 2k; Mr. B: variable budget)
- What is our choice of vehicle? (Mr. A: Plane; Mr. B: Car)
Is Berkshire the “Best Stock” to Invest in?
Without realising “Suitability”, we tend to ask questions on “What’s best?”.
Sure, Berkshire, under the stewardship of Warren Buffett, the late Charlie Munger and the team, has expanded into a mammoth conglomerate worth US$ 985.1 billion presently. Berkshire has a track record for delivering mammoth returns and producing millionaires and deca-millionaires for the last 30-40 years. At US$ 685k, its Class A shares are the highest-priced stock in the world.
Source: Google Finance
But, as brilliant as it is in delivering returns, is Berkshire suitable to all of us?
Once again, this falls back to the 5 questions as listed above. For instance, if your aim is to build a portfolio to generate $X in dividend income a year, it is obvious that Berkshire is not suitable to you as Berkshire does not pay out a single dime in dividends. You won’t reach your “destination” unless you’re looking to sell off Berkshire and swap it for a dividend stock in the future.
However, if your aim is to 2X your capital, Berkshire can be considered. If so, this shall lead you, as an investor, to the next question – “How soon do you want to 2X your capital?”. Simply put, as guided by the Rule of 72, an investment needs to compound at a rate of 7.2% a year if you want to 2X your capital in 10 years. The shorter the duration, the higher annual rate you need for your investment to double in value.
Assuming that you wish to 2X your capital in 5 years. If so, you need to obtain about 15% a year in annual rate from your investment. Thus, the question is – “Did Berkshire increase its business earnings at a minimum rate of 15% a year?”. Also, does Berkshire have the ability to continue in doing so in the future?
This requires you to study its annual reports to figure this out. Let’s assume that you find that the company has the ability to grow its earnings at X% per annum. So, if the X% is above 15%, then it fulfils your objective. But, if the X% is well below 15%, then it doesn’t fulfil your objective.
Even if you find Berkshire to be suitable, the next question will be on its stock price – “Is its stock price currently suitable for investment?”. This would involve you calculating its P/E, PEG, and as well as its historical P/E. Some would use P/B and historical P/B as a valuation tool. Your choice on valuation tools will influence your outcome on Berkshire.
Also, if you have $X in capital, how much of that capital would be used to invest in Berkshire? Is it all of it or some of it?
By now, you should be able to see that factors like: “Where you like to be financially”, “How soon you like to be there financially” and “the price you are willing to pay” could influence how you will invest, which is your preferred choice of investment.
Therefore, suitability to your circumstances comes first.
Who’s The Best Person to Invest Your Money?
Is it you or an external fund manager?
Once again, it is a question on suitability. So, if you are one who is interested to learn, desires to be more hands-on, and take ultimate responsibility for your investment performance, the answer is clear – “You”. You are the best person to invest your own money. You can determine your ideal goals, pick up investing skills, practice and sharpen it over time as you build your portfolio. Such would offer a sense of financial liberty like no other. It is like knowing how to drive a car until that has become a part of you. It’s like second nature.
The first step is for you to answer the following:
- Where are you financially? (income, expense, assets, liabilities and net worth).
- Where do you like to be financially in the future? (What will your portfolio look like?)
- How soon do you want to be there? (Annual returns and time frame)
- What is the price you are willing to pay?
Once that is considered, you may assemble a team dedicated to helping you achieve your goals and aspirations for your financial life. For instance, if you’re looking to build a dividend portfolio, I believe it makes sense to learn and immerse yourself with dividend investors over stock traders. That’s how you can move forward.
For those of you, who intend to learn how to build a Dividend-based Portfolio or a Growth-based Portfolio, once again, it is a matter of suitability between the educator and yourself. Below would be the links to free webinars so that you can check us out and assess if we’re the right fit for you personally.
Dividend Investing:
Free Webinar: How to Build a Stock Portfolio that Pay Increasing Dividends?
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?
