What is the job of an investor?
‘Well duh … isn’t it to make money?’
If that is really what you believe, think again.
Take stocks as an example. For a start, a person could choose to make money in stocks either through capital gains, or from receiving dividends, or the best is to have both. Oftentimes, the focus is placed greatly on the returns from making a decision on a stock purchase. So, what is the issue? Here, let me explain:
a. If a Person aims for Capital Gains
His focus would be on how he could buy stocks and sell them at higher prices in the stock market. To him, it is even better if the time gap between the purchase of his stocks and the sales of his stocks are short. It is about making money fast.
So, is this about ‘buying low to sell high’? Well, not really. This is because to buy low, you need patience. You need to be cool with holding onto piles of cash and have low levels of ‘buy and sell’ activities. Thus, it is a waiting game and it is not for some people who want to ‘speed things up’.
Instead, some may find stocks with ‘momentum’, buy them and sell them when their prices are higher. So, it is about ‘buy high to sell even higher’, which is also known as the ‘Greater Fool Theory’. It is about endorphins and catered for thrill seekers over wealth builders.
That is gambling, definitely not what investors do when investing.
b. If a Person aims for Dividend Yields
He may have a tendency to invest in stocks that have higher dividend yield. But, what is the problem with this? Isn’t this what I am teaching people to do? After all, the name of the membership is ‘DividendVault.com’.
Let me explain. First, unlike people who chase stocks for quick capital gains, this group of people are often made up of aspiring investors who lack experiences. I too was part of this group when I started investing for I had made mistakes that resulted in losses as a result of focusing solely on getting ‘high dividend yields’.
Here was what I did. I chose a stock that has poorer fundamentals over another which has solid fundamentals because the one with the poorer fundamentals is paying out better dividend yields over the solid one. Bad move. I had fallen into a handful of value traps and learnt that a stock that pays 8% in dividend yields a year is not necessarily a better investment than another that pays 5%.
Hopefully, you would not repeat my rookie mistakes for your portfolio.
c. What do I focus on?
Ironically, while most focus on returns, I believe it is helpful for investors to take care of their downside immensely. It is about risk management and this topic is less emphasized among the investment community. Hence, I would like to bring it up to you as it is a vital component to building a sustainable stock portfolio.
So, back to the question, ‘What is the job of an investor?’
I believe you might have a better picture of what savvy investors really do when investing if you look at investments from the perspective of a banker, who truly are masters of risk management. For me, I like to describe my job as an investor as being similar to a credit officer of a bank whose job is to process applications of loans from its loan applicants.
Picture Yourself as a Credit Officer in a Bank:
Every month, hundreds of loan applicants visit your branch to ask for a loan. So, are you going to approve all their loan applications and disburse loans to them?
Of course not. This is because you will be required to follow a strict S.O.P. which is formulated from the bank’s credit policy to process these loan applications. If you keep on approving loans without following the bank’s S.O.P., do you think it is possible for you to keep your job as a credit officer in a bank for long?
Can you see why a credit officer would ask for you IC No., pay slips, income tax files, bank statements, EPF statement, credit card statements, CCRIS, CTOS, and other relevant documents before approving your loan applications?
The bank wants to know who you are, what you do for a living, what is the level of your income, how much debt are you committed, how is your track record in making debt repayments … etc before disbursing the loan amount to you. Thus, the key is about assessing your creditworthiness before lending to you.
If a bank adopts a sound credit policy, it would have better quality of borrowers who can service their loans, making the bank rich for it has low non-performing loan (NPL) ratio. The secret to a well-run bank lies in its credit policy.
Stock Investing is Like Credit Assessment
Likewise, as an investor, I will download annual reports, quarterly reports, press releases, and investors’ presentations of a stock to assess its ‘creditworthiness’.
If a bank would look at my CCRIS to trace my debt repayment behaviour before lending money to me, I would look at the stock’s financial records over a period of 10 years to assess its track record of sales, profits, and cash flow so that I can trace the stock’s dividend payment behaviour before investing into it.
Does it make sense?
Can you imagine stock investors who don’t do credit assessments before buying their stocks?
If a well-run bank is rich as it has low NPL ratio due to adoption of a solid credit policy, then I will say a solid credit policy is vital to reduce your non-performing investments and thus, building yourself a sustainable well-run stock portfolio.
What is in Your Credit Policy?
So, if you are new to investing, I sincerely believe you will do well in it if you can start your investment journey by setting up your ‘credit policy’.
And, if you had failed to attain your desired investment returns from your stock portfolio, it is time for you to revisit your ‘credit policy’ or S.O.P.s before making your next investment.
Here, if you like a reference, you may use mine as a guideline to modify and set yours up:
If you’re interested to find out how I’m building my stock portfolio, I’d arranged a free training session for you below: