Are stocks good investments?
Well, it depends. The question is, ‘Are you a good stock investor?’
The first question is on the investments and their potential returns. Meanwhile, the second question places the focus on the investors. You see. Today, there are people who dream about attaining great investment returns, but fail to see that the returns are a reflection of one’s diligence in mastering the art of investing.
There is a process to the profits.
The process is one that allows an investor to replicate and sustain the returns in investing in the long-term. Thus, this write-up is about the process or the journey I had taken to become a better investor who can build a resilient portfolio, which brings better investment returns at lower risk compared to most. In brief, I have the following route, which includes:
#1: The Mindset Phase
My first exposure of stocks was in the 1990s. Back then, I was still a schoolboy. I noticed my relatives and some ‘uncles’ in church talked about stocks. My father opened an account and bought a few stocks after some recommendations from his ‘trusted experts’. Needless to say, his investments flopped and lost money.
As such, I subconsciously believed that stock investing is risky.
So, my first step was to change my belief on stock investing. This involves lots of reading books on successful investors such as Warren Buffett, Robert T. Kiyosaki and Jim Rogers. I realised that stock investing is not exactly what I used to think (which was essentially gambling) but rather an act to build wealth progressively from accumulation of shares of good quality businesses. This leads us to:
#2: The Skill Learning Phase
I learnt that financial statements are report cards which would tell us about the fundamental qualities of a company (stock). Thus, I attended accounting school to learn about interpretation of financial statements.
I began to practise what I learnt in school by downloading the annual reports of all kinds of stocks listed on Bursa Malaysia. I have compiled their financial datas and compared them to their stock price movements for the long run (10 years). It is a lot of work and I gained knowledge and insights from them. Of which,
#3: The Portfolio Set Up Phase
I began to develop a set of criterias of my ideal stocks. This would include some requirements on a stock’s fundamental qualities and valuation ratios. Of which, I started to build a database of 30 stocks that fulfilled such criterias and I would include them in my watch list. I’ll consider investing in them if their stock prices are attractive.
#4: The Prototype Phase
Up till now, I have yet to invest a single sen into any stock.
All I had was an investment concept, a strategy, and a database of stocks. I have gained much education, did my homework and now, it is time to put everything that I have learnt about stock investing to the test.
I had some savings. But, I was not about to dump it all into the stock market.
What I did was to test it out with small capital. I set a small target to construct a mini-portfolio worth RM 25,000. The goal was to enhance my learning, build up confidence with small victories and to gain much needed real life experiences.
Along the way, I made some small gains and incurred some small losses.
As such, I started to do some post-mortem to find out what worked well for me and what failed. That was how I learnt about value traps. So, I revisited my own set of criterias and have them tweaked. Thus, this explains why I’m now placing more focus on a stock’s fundamental qualities over its valuation ratios.
With renewed focus, I tweaked my own stock database and replaced the stocks that I had incurred losses into stocks that have better fundamental qualities. As such, my investment results improved over time.
#5: The Quantum Expansion Phase
By now, I have become more educated and acquired more real life experiences. Along the way, my income improved and I have excess capital to invest in stocks that are fundamentally solid with attractive valuations but at higher prices. So, I was able to scale up on my stock portfolio at lower risk with the combination of education, experiences, and excess capital.
So, Are Stocks Good Investments?
I would say, the better I am as an investor, the better returns at lower risks I will receive from my own stock portfolio. If you look at the 5 phases above, you will notice that it is an evolution of the ‘Be-Do-Have’ concept, which starts from the changing of a mindset, to doing the stuff in order to get the desired outcome.
Hence, will stocks be a good investment to you?
I believe the answer lies in your commitment to stick to the process of learning, growing, and maturing as a stock investor. Otherwise, if you choose to continue on your belief that stocks are just a fun game of luck and probabilities, it is very much possible that you will remain at that level until you change your mindset.
Of course, if you read this, I’m positive that you belong to the group, where you want to master the art of investing and have this wealth-building skill for life. In light of this, you may check out my free training below: