Here is a case study:
Let’s say, we have two investors namely, Lim and Ben. Both of them had studied the fundamentals of Maybank and had decided to invest in it for dividends over the long-term. Hence, they kept Maybank into their own watch list respectively. Then, in March 2020, we had MCO 1.0 and the stock market tanked.
With an uncertain market, Lim has decided to wait-and-see until the situation is more stable in the near future. He viewed that the loan moratorium will impact Maybank’s earnings in the short-term. Also, Lim believed that he is pretty gifted in market timing as he occasionally used technical analysis to time the market.
True enough, Lim had noticed that Maybank had dropped to RM 7.00 a share in October 2021. Lim believed that Maybank could not possibly go below RM 7.00 a share, but he was not super sure. Hence, he purchased 700 units of Maybank, which worked out to be RM 3,500 in investment capital. Lim thought to himself, ‘If Maybank dropped to RM 6.50 or RM 6.00, he would grab more of its shares.’
But, it never really happened. Since October 2021, Maybank’s shares have risen above RM 7.00 and now trades at RM 8.78 a share on 21 February 2022. So, for Lim, he kept his 700 units of Maybank shares and attained XIRR of 29.21% from his investment.
The XIRR of Lim’s investment is as follows:
On the other hand, Ben did not consider himself ‘a smart guy’ in market timing. He wasn’t that concerned about loan moratorium as he had a longer term view on Maybank. Ben calculated that from 2010-2019, Maybank’s P/E Ratio average is 12.83 and Dividend Yield average is 6.62% per annum.
But since the market was uncertain, Ben set himself a margin of safety (MOS) in investing in Maybank. He would buy if its current P/E Ratio is lower than 11 and if he could get at least 7.5% per annum in dividend yield. The P/E Ratio and also its dividend yield is based on 2019 EPS of 73.5 sen and 2019 DPS of 64.0 sen.
In addition to MOS, Ben devised a simple plan to buy 500 units of Maybank per month-end if it hits his own valuation criteria. Otherwise, Ben would not buy it. As a result, since March 2020, Ben would have bought 7,500 units of Maybank’s shares and attained XIRR of 19.54% from his investments.
The XIRR of Ben’s investments is as follows:
So, Who Do You Want to Be?
Is it Lim who attained 29.21% in XIRR from his Maybank investment?
Or, is it Ben who attained 19.54% in XIRR from his Maybank investments?
First undeniably, Lim beats Ben in terms of ROI, which is measured in XIRR.
But, if you ask me, I would prefer to be Ben than Lim. Over the last 12 months, I learnt that Maybank had declared and paid out 66.5 sen in dividends per share. If Maybank could maintain its dividends at 66.5 sen per share and I’m Lim today with 500 units of Maybank shares, I can expect RM 332.50 in dividend income a year. But, if I’m Ben who has invested in 7,500 units of Maybank shares, I would expect RM 4,987.50 in annual dividends.
Lim: 500 shares x 66.5 sen (latest 12-month DPS) = RM 332.50 per annum.
Ben: 7,500 shares x 66.5 sen (latest 12-month DPS) = RM 4,987.50 per annum.
Ben’s XIRR may be lower but he is much closer to attaining financial freedom.
So in this case, we can see that regular investing with a proper plan can be ideal to build wealth much more efficiently than one who preaches on market timing in the stock market. But, with that being said, it is important to take note:
1. It Only Works for Fundamentally Solid Stocks which are Undervalued.
Remember this equation:
Good Investment = Good Stock + Undervalued Price
Really, the question is, ‘If the stock is not fundamentally solid, why do you want to buy it in the first place?’. Could you build more wealth by having more shares that are just ‘plain rubbish’ as compared to the next person? As such, if you like to make this work, you need to focus relentlessly on the business fundamentals and valuation of the stock when investing.
2. It Only Works for the Planned and Emotionally Steady.
If you wish to invest like Ben, you must have an investment plan that consists of your objectives and a complete system to find good stocks and value them. This is because you must have a conviction of the plan that you had devised and not be easily swayed by news, fears, rumours and emotions that you may feel when investing.
3. It Only Works if You Shun Away from ‘Stock Gurus and Prophets’.
By now, you would notice that I don’t offer any stock recommendations in all of my materials. I don’t believe in the ‘You Jump, I Jump’ method of investing. This is because it is pointless. I believe that you can make wiser investing decisions if you have the right mindset, objectives, and system when investing.
So, that is it for now and I hope that you have enjoyed a good discussion on ROI vs Quantum when investing in the stock market.
If you wish to learn more about the art of stock investing, here is a free training that you can attend: