By Eric (guest contributor)
“I have found the enemy, and it is us!” When investing, we must take heed of these wise words. Indeed, the danger that most laymen fall into lies in us. Most laymen try to follow the Warren Buffett investment approach. It requires much time, hard work and an immense IQ. Yet, nobody will admit to these pitfalls.
The truth is, we cannot invest like Buffett, or any of the other gurus. The ordinary man, that is, most people, assume that his IQ is higher than average. If so, then who is average? Us, ironically! To make things worse, we have got kids to fetch, careers to take care of, and exercise to do. Frankly, most of us are just plain tired from living and excelling in this tiny, crowded and noisy island.
The 4 steps to earn your retirement
Let me give you an approach that works. Though I cannot prove that it will work in the future, I have been using it both for myself and in my career as a fund manager. I have observed value-investing colleagues in both Singapore and overseas – and it works. I have adapted and modified it for the layman investor here.
The overall plan is simple:
1. Be frugal
Cut all unnecessary expenses. For example, do not drink lattes – drink water. Do not drive – walk or cycle. Do not eat out – cook at home. Save. Every. Cent.
2. With your savings, go and buy a stock
If it is not enough, save another two to three months. Buy equal dollar amounts every period regularly.
Which stock to buy? Do not listen to your broker, friends or troll the Internet for stock ideas. Doing that will guarantee you will fail miserably.
Stock ideas must be generated independently.
This is the secret of success. Learn how to use a stock-screener. Just run it and choose stocks that are selling below book value and have been paying dividends for the last five years. Choose any one that strikes your fancy – and buy it! Only look at it when it has gone up by 50 percent. (Usually, it will not happen in a day or week or month or year). If you cannot wait, you do not deserve to be rich.
3. When it has gone up by at least 50 percent, you can then decide to sell it or hold it
It really does not matter. Do not ask me when to sell – it is more important that you have bought it. If it goes down, ignore it. If you sell it, use the money to buy another stock.
4. Repeat step 2 every time you have spare cash
Do not buy the same stock. Make sure each time it is a different stock. Beware of putting all your eggs into one basket. Diversification will protect you against yourself.
If you do this monthly, at the end of five years, you should have about 60 stocks in your portfolio, and the capital gains would be a tidy sum, not counting all the dividends. Reinvest your dividends – it is not free money for shopping. Aim to have about 100 stocks in your portfolio, with each one having equal weightage of one percent each.
First warning: Beware of stock market euphoria
When the market is euphoric – do not suddenly pump in large amounts of money into stocks. 99 percent of the people do this because our egos are inflated upon seeing the stocks that we have diligently accumulated rising stratospherically in market values. Hence, all our self-congratulations will spur us to add in more money. No! Stick to the plan!
Second warning: Stick to the plan even if the market crashes
If the stock market plunges by more than 50 percent (as seen during the 2008 financial crisis) – do not sell your decimated stocks. Just hold on, take a deep breath, and keep adding. Stick to the plan!
When do you stop?
When your dividend income from your portfolio can fund your expenses – then you have earned your retirement!
By guest contributor Eric, co-founder and fund manager at Aggregate Asset Management, who blogs at personal finance blog Big Fat Purse.