The Intelligent Investor
If you have more than 120 or 130 IQ points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.
— Warren Buffett
“The Intelligent Investor” originally published in 1949 was written by Benjamin Graham, often acknowledged as the father of value investing. The book provides many insights and anecdotes that are still applicable today and has guided many investors in their quest for determining value in the stock market. Investment methodology may be easy to educate but patience, controlling your emotions, and having the guile to make certain decisions are far harder skills to teach.
As Warren Buffett said, you don’t need superior intellect to succeed as an investor. You can achieve financial success by playing the long game and avoiding trends — focusing instead, on balance, discipline, and diversification.
Despite what many investors think, you really cannot control the markets or consistently predict what could happen to the prices of stocks, bonds, interest rates, currencies, and commodities tomorrow. You can’t control the economy and neither can you influence the outcome of an individual stock. The best chance for investment success is to take ownership of your finances in a sensible way - as detailed in the following points.
Becoming a Disciplined Saver
No matter how much money you earn, as long as you spend more than you take home, then you are on the road to financial ruin. Make a habit of putting money away. If saving money doesn’t come naturally to you, find creative ways to make it a fun challenge. Consider the changes you’re willing to make in order to set aside a little more for your future. That being said, there are many individuals we have spoken to who embrace a “YOLO” philosophy and are adamant in maintaining their lifestyle in the here and now, even if it prevents them from setting aside money for their future. In essence, they want to enjoy the fruits of their labour and do not see a reason to save for the future. It is perfectly fine to live by this philosophy — as long as this decision was made with full awareness of the possible downsides and repercussions later on.
Investing with a Game Plan
Establish clear, attainable goals and create a plan that will help you reach them. Be conservative in your projections about how fast your money will grow — for instance far too many investors wrongly assume (either through ignorance or a lack of knowledge) that investing will give them double-digit returns of 15% or more. Long-term stock market returns range between 8 to 10%, with bond market returns around 2 to 4% (in SGD). Any investment purporting to give you high returns over a short period of time should trigger the alarm bells in your head.
Create a sound investment strategy by choosing an asset allocation that differentiates via asset class or broadly diversified funds which can give you the highest probability of success. The chart below shows the thought process and steps you can take when constructing your investment portfolio.
Control What You Can
You may not be able to control the returns of your investments, but you can control what goes into them. Active stock picking strategies which have high rates of tracking error to their respective benchmarks would not only expose you to higher volatility and risk, but also incur higher costs through the transaction and trading required for the management of such a strategy. Simple buy and hold portfolios with regular rebalancing, focused on asset classes and broadly diversified throughout global markets, are the best way for you to generate long-term returns.
Maintaining a Long-Term Perspective
As the saying goes, ‘even the best laid plans of mice and men often go awry.’ Sound investment strategies doesn’t magically erase the challenges and events that may happen over time, which will undoubtedly evoke various emotions in investors — feelings that may tempt you to cut your investments and run — but robust strategies will cushion the effects of those unforeseen drawbacks, and leaving you better off in the long run.
It definitely will be difficult to resist giving in to impulsive decisions at times — in those moments a guiding hand or a second opinion from a trusted advisor can help steady your nerves.
