Lately, I was given a list of questions on stock investing from a fellow subscriber. The first in the list is a question to understand about my investment philosophy. As such, I like to take a moment to pen down my thoughts on this topic itself.
So, what is my investment philosophy?
How did I evolve from a stock newbie to one who has a dividend stock portfolio that pays recurring dividend income year-after-year?
Is it because I am naturally gifted in picking stocks?
Is it because I was born with a silver spoon and received better education?
Nope, I was not. But, I would also say that I was not born into poverty either. As such, I was raised in a working class family and kept it superbly ‘local’ in regards to education. I am proudly a ‘Buatan Malaysia’.
So, coming back to the subject of my investment philosophy.
I will share my background, my journey and key lessons learnt in the past which have molded me to be the investor I am today. It is an evolution and as I write, I would say I will continue to evolve over time as an investor for ongoing learning is a big part of my journey as an investor.
Thus, here is the evolution of my investment philosophy:
Stage 1: Investment is Risky
It all started when I was a primary school kid.
My relatives were into the stock market. I was impressed that stocks are for the ‘big boys’ to make money fast without much physical labour. It was the boom in the 1990s when many regarded themselves to be geniuses in stocks.
My dad was caught in a euphoria. He opened a stock brokerage account and he bought a couple of stocks. Soon, he lost a significant proportion of his capital as the bull market turned bearish. It was the Asian Financial Crisis. In that period, I came to know that my relatives had also crashed together with the market.
Hence, I believed that stocks are risky.
Concurrently, I developed a sense of conservatism and became risk averse.
Stage 2: Rich Dad Poor Dad
Years later, I entered college.
I was handed a copy of ‘Rich Dad Poor Dad’ by a college mate. It has opened up my eyes about money and I have become interested in the subject of investing.
Hence, I began to read books written by or written on legendary investors, such as Warren Buffett, Robert Kiyosaki, Jim Rogers … etc. One of the most profound lessons I had learnt is stated below:
Wealthy investors (like bankers) invest for cash flows.
Investing for capital gains is not really investing, but gambling.
It impacted me deeply.
I began to assess all investments based on their abilities to generate cash flows, not capital gains. That is why when I assess stocks, I will read their statement of cash flows to check on their capabilities to pay me dividends for the long term.
Thus, I had chosen to become a dividend investor, not a stock trader.
Stage 3: Mistakes in My Formative Years
Despite all the investment books of the world, I was not spared from mistakes.
I had adopted some investing principles. But, I was still raw and inexperienced.
I bought stocks based on its dividend yields. To me, a stock was better if it could pay out higher dividend yields than others. Dividend yields were more crucial in deciding an investment, as compared to a stock’s business model and its quality in terms of its fundamentals. Hence, in the past, if I was given a choice between two stocks: A Bhd and B Bhd.
A Bhd is a fundamentally solid company that pays 3% in dividend yields a year.
B Bhd is fundamentally a lesser company but pays 8% in dividend yields a year.
I would opt for B Bhd and it was proven to be a bad move.
It turned out that A Bhd has become a much better investment than B Bhd. The people who invested in A Bhd gained their 3% dividend yields and capital gains. Meanwhile, the people who invested in B Bhd had incurred total loss as a result of capital loss but were consoled with some dividend income (sagu hati).
Ever since, I had repented.
Today, if I am given the same choice above, I would go with A Bhd.
So previously, it was dividends first, business model second.
Right now, it is the business model first, dividends second.
Stage 4: Finding Purpose as a Value Investor
Months ago, I listened to a podcast by Andy Tanner, US-based stock investor.
Of which, I learnt that businesses (stocks) exist to produce a product or services that could add value to our community at large. It is all about being a service to people so that the quality of our lives can be improved over time. Hence, I have started to rethink and reflect about investing and my purpose behind it.
Let me explain:
Previously, I believed that investing is all about building my own wealth. Hence, for a stock or real estate deal, I would assess them based on the following:
a. What are my returns like for this investment?
b. How much is my dividend / rental yields from this investment?
c. How much capital gains could I potentially realise from this investment?
d. How much discount am I getting for this investment?
e. What are my potential risks involved in this investment?
These questions are still valid and I do have them answered before investing.
But, here is the thing, ‘Can you see that these questions revolve around me and me alone?’. It is all about my capital, my risks, my returns, my net worth, … etc.
Since then, I have added to the list above with one additional question and that is:
‘How can I use my capital to support companies (stocks) that add genuine value to our community at large while being largely profitable over the long-term?’
So, in the past, I looked at a stock’s statement of cash flow to check its ability to pay me recurring dividends. Today, I still do the same but now, I would also look into its statement of cash flow to find out if the stock is well-funded to invest in research & development (R&D) activities or expansionary activities which could transform itself to become ‘better servants’ to its customers in the future.
This explains why I would read as many official materials as I possibly could find about a stock’s plans for growth to decide if I want to participate in it.
Official materials would refer to Annual & Quarterly reports, Press Releases and Investors’ Presentations of a stock (company).
Hence, I’m aligning my future investments based on my personal values and my beliefs on how these investments could better serve the community at large. To me, it brings more value, purpose, and meaning to investing itself.
Conclusion: What is My Investment Philosophy?
Presently, I would say it is listed in the following order:
1. Impact: How do my investments serve and impact our community?
2. Business: Does it have a resilient business model?
3. Cash Flows: What is its track record of profits and dividend payments?
4. Stock Price: I Like Discounts when Investing in These Stocks?
5. Crowd Following: I Don’t Follow the Crowd. I Advocate Studying.
That is it for now.
I believe my investment philosophy could evolve over time as I continue to gain more knowledge, insights, and wisdom on investing.
And thus, my journey continues on.