Part III of my take on some of the key points from The Psychology of Money. Click links below for the first two parts:
Chapter 5 Getting Wealthy vs Staying Wealthy
Firstly, I would like to declare that I am not wealthy. A recent study released by Knight Frank indicates that to be the wealthiest 1% in Singapore, you need to have a net worth of at least US$3.5 million. I definitely do not belong to that category and truth be told, I do not even have SG$1million in liquid asset. Yet.
I do have enough though to lead my current simple life style and I need to ensure that this can last me as long as possible. Hence, the ideas from this chapter are still relevant to me.
“More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”
– page 62
This has become more important to me since I started on this new journey. In the past, I could rely on my active income to ride out any crisis. From the dot.com bubble in 2001 to the sub-prime crisis in 2008 and even the recent Covid-19 pandemic, my active income has allowed me to sleep soundly at night despite the huge drop in my portfolio. And because I was a saver, I was even able to pick up some bargains during these periods.
What I do now is to have sufficient cash to cover at least 3 years of expenses, so that I do not need to be forced to sell my stocks during a bear market. Hopefully history continues to favour me, so that I can survive the current and future bear markets.
“Planning is important, but the most important plan of every plan is to plan on the plan not going according to the plan.”
– page 63
Housel uses the term “room for error” or also commonly known as “margin of safety”. I asked myself “what if” questions. When planning whether I could ditch my regular income last year, I was targeting an average 10% return for my equities portfolio. While past record shows that I could do that, there’s no guarantee I can continue to achieve that going forward.
So one question I asked myself was, “what if I don’t get 10%? What is the minimum rate of return so that I don’t run out of money?” Churning the numbers on a spreadsheet indicated that I should still be ok even if I only achieved an average 6% return eventually.
What if I get less than 6%?
While I hope it doesn’t go there, there are still levers that I can still pull if that really happens. Off my head, I can adjust expenses and do some part-time work. Not fretting over it now and like what the FED is doing with interest rate, l will make the decision based on what the data is telling me.
You can read my previous post if you would like to find out what went through my mind then.
Chapter 6 Tails, You Win
In a nutshell, only a few things account for most of the results. Housel quoted Peter Lynch, Warren Buffet and George Soros in this chapter and I will reproduce them as follows.
“Peter Lynch is one of the best investors of our time. “If you’re terrific in this business, you’re right six times out of 10,” he once said.”
– page 78
“Warren Buffet said he’s own 400 to 500 stocks during his life and made most of his money on 10 of them.”
– page 80
“George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.”
– page 80
These are titans in the investing world but what they experienced is still applicable to small retail investors like us. My own data as presented in the table below clearly shows that.
Over more than 20 years of investing (yes, feeling old), my win rate is only 58%! However, for every dollar that I lost during this period, I made about $4.6 in profit. Also, my top 10 counters (that’s just 3.8% of my pick) account for 75% of my net profit!
Lucky? Perhaps, but I think it is simply Mathematics. Without leverage, the maximum possible loss for each counter is 100% but the upside is unlimited. Hence over time, outlandish return from just a small proportion of the portfolio will drive the overall return.
In ending, what has worked for me is to invest in good companies and being able to hold on to them during bear markets. I do not know which counter will give me the biggest return initially but some of them did eventually. I would also like to reiterate that buy and hold is not buy and forget. Continue to monitor and adjust your portfolio accordingly when new data presents itself. What is supposed to a hold forever counter at the initial assessment might not be so years later.