Old Investing Advice Gems from Wallstraits days

[mrEngineer]

One thought surfaced on reading this thread, how do we assess companies ability to pass price increase to it's customers? Sustainable gross margins?

[Musicwhiz]

I've got a few gems myself saved up over the years as well as a chunk of d.o.g's wisdom, but need to organize the information to present it in an easy-to-read format. This is courtesy of cif5000 who passed me the information which he saved and archived back during the Wallstraits days. This is more on personal finance rather than investing but both are very important for wealth-building. I would like to give special thanks to d.o.g. for his post made in 2003 has helped to provide a beacon for me to steer me through the maelstrom of events in my life which threatened to eat up my wealth, and I managed to successfully navigate through to where I am now. Thank you.

(Note: I will post more of such old nuggets of wisdom over time in this thread. This is just the first one. Questions are asked by other forumers; replies are all given by d.o.g.)

Posted by d.o.g. on December 29, 2003:-

Q: What’s your advice for a young guy seeking financial freedom?

Same as before: "Work hard, but save harder, insure against disaster, and invest wisely, in that order." I don't know of any legal shortcuts, sorry. If anyone has other ideas I'd like to hear from them. Oh yes - children. Have children if you want, but recognize that children cost money to raise - money that could otherwise fund your retirement.

Unless your child grows up to be Bill Gates, he'll never give you money that reflects what you put into raising him. So more children = less money. But children can bring you happiness, so you'll have to make that choice with your wife.

Q: And don't mind me asking, which line are you in?

I'm a salaried worker (wage-slave). I decided a while back that a lifetime of work didn't seem too appealing, so I started reading about early retirement. Three topics popped up consistently: working hard, living within your means and successful investing. Books like The Millionaire Mind, Wealth of Experience and The Richest Man in Babylon convinced me that combining the three would maximize my chances of retiring early.

Comment: One point which I have to disagree with you reluctantly is that of working hard... one cannot save and hope to become rich unless you are either drawing a big paycheck or run your own profitable business. (Rich Dad, Poor Dad). One has to invest prudently and take certain amount of risks (such as in stocks)

Reply: The size of your income is not perfectly correlated with the size of your balance sheet. Although a high income increases the chances of having a large positive net worth at any particular age, there are many people who have far more or less money than would be expected given their income level. The reason is simple: savings - or the lack of it. If you don't save, you can't invest.

As far as investing is concerned, one must keep in mind that while percentage gains are used to normalize returns for comparison, in truth it is the absolute gains that matter more. A 100% gain on $2,000 of capital is impressive, but it's still only $2,000. A 2% gain on $10m is nothing to shout about, but that's $200,000, which is a nice living allowance for a year or two (or more depending on your lifestyle).

We talk about the power of compounding, but in the early years the best thing you can do for your portfolio is not to invest smartly, but to simply add to it as aggressively as you can. Take the first year and $1,000 of capital. If you do nothing, it's still $1,000. If you invest it wisely perhaps you get 20% on it for a final value of $1,200. But if you save aggressively in the first year you could accumulate $2,000 or $3,000 more to invest with, and your final value becomes $3,000 or $4,000, or maybe $4,200 if you also invested the $1,000 wisely.

You can see this visually for yourself with a spreadsheet - build 2 graphs, one with yearly additions of say $3,000 and a growth rate of 15%, the other with a yearly addition of say $6,000 and a growth rate of 5%. It takes many years (12, to be exact) before the 15% graph catches up with the 5% graph, after which it admittedly grows much faster. If you can save $9,000 a year your lead is even longer - more than 18 years! You can also try graphing $9,000 a year at 10% - the lead is now 32 years. In other words, when your portfolio is small, concentrate on adding to it. Save aggressively, even if you choose to invest conservatively. The mere act of saving more can increase your portfolio from $1,000 to $10,000 within a few years. Such a tenfold increase via organic portfolio growth is very difficult to achieve in a short span of time and cannot be relied upon.

Naturally, as the portfolio grows and your additions to it become smaller in terms of impact, the internal rate of return becomes more important. Adding $3,000 to a $100,000 portfolio isn't as effective as adding $3,000 to a $6,000 portfolio - the key is now the organic growth of the $100,000 itself. Hopefully, by then you've had enough experience with investing that you don't make too many wrong choices when trying to improve your rate of return. And even if you make mistakes, with an aggressive saving habit you can still quickly rebuild the portfolio.

Don't discount the saving habit - without enough savings, you won't be able to build a portfolio of sufficient size quickly enough for compounding to be significant. At the very least, saving aggressively and investing wisely will bring forward your retirement age by several years. Try graphing $9,000 a year at 15% - it's very attractive. In cases where your income is sufficiently high, savings alone, without investment, may suffice to provide for a simple retirement.

This all boils down to:
1. Work hard to maximize income (from job or business)
2. Save hard to maximize investment capital
3. Insure appropriately to guard against financial disaster
4. Invest wisely to maximize returns

To maximize the chances of financial security, all 4 actions should be taken. Leaving any of them to chance is not wise, as each could be a deal-breaker by itself:

• Loss of job/collapse of business
• Negative cash flow due to lavish lifestyle
• High medical expenses due to illness
• Capital loss from poor investments

Buffett's approximate net worth of $30b is impressive, but back-solving his 23.8% CAGR over 40 years shows a starting capital of $5.9m. If he'd started with $5,900 instead, he'd be worth only $3m today despite having the same CAGR, and nobody would take notice of him - he'd be just one of many millionaires. The point? To achieve financial security, you should start with (and keep adding) as much capital as possible, even as you invest to the best of your ability.

(End of Post)

[kazukirai]

One thought surfaced on reading this thread, how do we assess companies ability to pass price increase to it's customers? Sustainable gross margins?

Hmm...given my very limited accounting knowledge, I'm gonna venture a guess. First, I assume 'price increase' to be increase in costs.

However, increase in costs could be due to increase in price of raw materials or increase in operating components e.g. wages, rentals etc..

If the price increase is from COGS, then the sustainability of gross margins would be the thing to look at. However, if the price increase comes from wage inflation, then it should be operating margins.

---

To achieve financial security, you should start with (and keep adding) as much capital as possible, even as you invest to the best of your ability.

This is an amazing thread.

Although I was pretty late to the Wallstraits forum (and I was more of a lurker then), I guess it's better to be late than to never have found it at all. The posts from Wallstraits, Afralug and now ValueBuddies have helped me greatly and I think it's wonderful that MW has dug out and shared this post by d.o.g.

I remember reading this post before but I don't think it was with me consciously. Thankfully, I've been following this advice in spirit. Personally, I started from mid 4 digits and am now closing in on 6 digits after 4 years. I'm not a high income earner, just started working in mid '08 and my investment returns is far from superior. I think others like MW and Momoeagle (if you've followed the records on his blog) will agree with me that this advice works and now with this re-post, the logic and math are all clearly articulated as well. This way helps me sleep better at night too.

So, at the risk of sounding like an old soul, I think that young investors who think that the way to go is to start with a small sum and keep getting superior returns y.o.y by purely using that sum, all I can say is 'Good Luck'.

Financial Independence, in my opinion, is more wealth accumulation and preservation than generation.

[Musicwhiz]

Hi Kazukirai,

Glad you like the thread so far! I am so happy that everyone is coming out to share their nuggets of wisdom, and I definitely want to join in the "party" hahaha. Must also give a special thanks to Moolah for starting this thread.

Onwards to the 2nd and 3rd posts by d.o.g., also in 2003 if I am not wrong...

Q: The Millionaire dream for most of them (i.e. young people) could only be attained by investments. And the stock market is one of them that gives a better chance.

I agree. I just wanted to point out that people should not ignore their primary source of income (their job) even as they concentrate on building their secondary/passive income (their investments).

Even for successful investors, the income from their jobs will dwarf the passive income from their portfolio for most of the early years. Most of us can probably earn $30,000 or more annually. But how long will it take us to build up a portfolio that can generate $30,000 in income? Assuming a generous 8% yield, we'd need a $360,000 portfolio. That would probably take 10-15 years to build, maybe longer. Until then, we shouldn't ignore our jobs.

Yes, there are definitely thousands of such salaried-worker millionaires. Their discipline (and good luck) are an inspiration to us all. But there are even more millionaires who were not minted in the stock market. If the goal is simply to acquire wealth, and not just acquire wealth via the stock market, then we should take all relevant actions to maximize our chances of reaching this goal.

Working hard and saving hard improve our chances of getting rich, even if our stock market investments aren't great - as I mentioned previously, with a sufficiently high income, one may not have to invest at all. And certainly, saving only a little bit but picking the right stock (like Berkshire Hathaway) can still make one a millionaire. However, most of us are somewhere in between these two extremes, with neither a sky-high income, nor Buffett-like stock-picking talent.

For myself, combining aggressive savings with wise investment seems to be the best way to maximize the chances of acquiring wealth - or at least escaping poverty. As to what constitutes aggressive, everyone must decide for himself. No one is compelled to survive on bread and water, but dining out every night at a gourmet restaurant would probably qualify as lavish.

I won't deny the pleasures of material goods. I have enjoyed owning a luxury car, and the newest technology gadgets are a rush to play with. But I now prefer to limit my indulgences in this regard. Analyzing stocks is a great intellectual thrill for me, so it's no big punishment to play this game. Of course, I play to win!

Q: Buffet realized that buying businesses is much better than buying stocks? As in, are businesses like more profitable or weather-proof than stocks which can fluctuate up and down because of some news.

Buying a business and buying a stock happen to be exactly the same thing. A stock is a part ownership in a business, nothing more, nothing less. It just happens that if it's listed on a stock exchange, it's easier to buy and sell than an unlisted company. The price of a listed company can fluctuate wildly. Its value does not.

Traders treat stocks like inventory - they buy in order to resell. Investors treat stocks like assets - they buy in order to use. For inventory, the selling price is of prime importance. For assets, the utility (cash generation) is of prime importance. Are you a trader, or are you an investor?

Buffett buys a lot of unlisted companies for several reasons:

1. If word gets around that he's buying into a listed company, the price of the stock shoots up, raising his cost. No such problem with unlisted companies - he's often the only bidder.

2. Not all good companies are listed. Some of the best companies are privately held.

3. He can name his price without worrying about the benchmark (public price).

Listed shares are advantageous to an owner only in terms of liquidity - he can easily dispose of his shares as he sees fit. If, like Buffett, he has no intention of selling, there is no advantage to having the company being listed. The company's operations are not affected by its status as a private or public entity.

Being listed does not improve the profitability of a company - in fact it is actually negative because of the additional cost of compliance with disclosure requirements. That's why many tightly held companies end up going private again - it's not worth paying thousands of dollars annually to maintain the listed status just because of a few minority shareholders. Better to just buy them out and delist - the savings are often substantial.

(End of Posts)

[cif5000]

Q: Buffet realized that buying businesses is much better than buying stocks? As in, are businesses like more profitable or weather-proof than stocks which can fluctuate up and down because of some news.

Buying a business and buying a stock happen to be exactly the same thing. A stock is a part ownership in a business, nothing more, nothing less. It just happens that if it's listed on a stock exchange, it's easier to buy and sell than an unlisted company. The price of a listed company can fluctuate wildly. Its value does not.

Traders treat stocks like inventory - they buy in order to resell. Investors treat stocks like assets - they buy in order to use. For inventory, the selling price is of prime importance. For assets, the utility (cash generation) is of prime importance. Are you a trader, or are you an investor?

Buffett buys a lot of unlisted companies for several reasons:

1. If word gets around that he's buying into a listed company, the price of the stock shoots up, raising his cost. No such problem with unlisted companies - he's often the only bidder.

2. Not all good companies are listed. Some of the best companies are privately held.

3. He can name his price without worrying about the benchmark (public price).

Listed shares are advantageous to an owner only in terms of liquidity - he can easily dispose of his shares as he sees fit. If, like Buffett, he has no intention of selling, there is no advantage to having the company being listed. The company's operations are not affected by its status as a private or public entity.

Being listed does not improve the profitability of a company - in fact it is actually negative because of the additional cost of compliance with disclosure requirements. That's why many tightly held companies end up going private again - it's not worth paying thousands of dollars annually to maintain the listed status just because of a few minority shareholders. Better to just buy them out and delist - the savings are often substantial.

For better clarity, "businesses" should be read as "private companies".

There are distinct differences between company, stock and business.

A company is a legal entity and is a house for everything - the business(es), the non-business related assets and liabilities, its tax position, subsidiaries, the people it employs and that can be non-business related as well.

When you buy a company, you get everything, including the things that you don't want. If you want to buy only the business without buying the whole company, stocks is not the way to do it.

E.g. Eastern Holdings.
It had a very good Event business but the company has also a substantial amount of properties. So buying the stock to get the Event business is not a 1:1 relationship. One has to weigh the effect of the "contamination". As we witness, SPH bought the business without buying the company. (Ignore the fact that the business is housed under a subsidiary, but the whole idea is the same.)

The ownership of a company is divided into the stocks. However, owning the stock does not mean owning the company. To really own the company, you need to be able to exercise control.

E.g UIC.
Who is the owner of the company? Shareholders collectively own the company, theoretically yes. But why are the 2 tycoons fighting between themselves? Because only when you have control, you can dictate what you want to do with the cash and assets in the company.

Warren Buffett likes to view stock ownership as company ownership because he has the resources to take over the control and cut off the non-business related portion if he wishes to. Retail investors may not be capable of doing it.

The present ownership structure may also prevent you from doing so even if you are well financed.

E.g. Portek.
If the current controlling shareholder refused to sell, the buyer gets only the stocks but not the company.

+++++++++++++

This is to record my gratitude to d.o.g.. I don't know what I will be doing if I had not read his writings. If one is lost after reading Graham and Dodd, Fisher, or Warren Buffett, he should read d.o.g..

[yeokiwi]

This is to record my gratitude to d.o.g.. I don't know what I will be doing if I had not read his writings. If one is lost after reading Graham and Dodd, Fisher, or Warren Buffett, he should read d.o.g..

d.o.g., have you considered writing a book?
In many ways, you can explain better than most investment books that I had read.

Or collectively, Valuebuddies' forum members can contribute enough articles to write a book on investments.

[Satchmo]

Very nice thread. Vaguely remember reading some of them in the past. A big thank you to all the contributors for their efforts.

Great advice and insights but being able to follow them is an entirely different matter.

Here is a newbie question: How do u all pick ur initial selection of companies for analysis? With the aid of publications? If so, do you mind listing a few?

Sad to say, after 3-4 years since I became interested in investing, I am still big greenhorn and my returns are meagre, although I have gained in terms of knowledge.

[Temperament]

Thanks Moolah!

It sure brings back fond memories of Wallstraits days... I was more a reader then. Never commenting or posting. Just absorbing. It seems every cycle, history will repeat itself.

Somethings have to be learnt personally and the hard way. Its just the way it is. We are all different individuals.

By the way, I miss Lark! She must be enjoying her days of leisure now.

---

Thanks Jared Seah,
From you, i have discovered this "priceless investing webside" . i am here because i can not stop learning. If i stop that's the end of my life. i remember besides Wallstraits, we have share-investor also which was free for some times until they capture a sizable group of members. Of course now it belongs to SPH.(Dr. Michael Leong made a $$$ selling off, if i remember his name correctly).

---

"Swing the bat less often, only when I have an advantage or when blood is in the streets (when Great Depression repeats)."

i wonder whether this author's article is appplicable to the above maxim?

Making Money from Stocks & Shares – Jamie E Smith.
Chapter 7

Time is your ally - the Harley Davidson example.
WITH INVESTING, THE MORE TIME YOU HAVE THE BETTER IT GETS

Harley Davidson is in my view, a special company. I have been interested in Harley Davidson Company for a long time and waited many years (it felt like very long years) before buying shares in this business, finally in early 2009. I had wanted to buy shares in Harley Davidson for nearly five years prior to that date, but, as often the case in investing, time is your ally. I will not pretend that it was easy to resist buying them earlier and many times I was tempted to, but the correct course of action was to be consistent with my investment principles and it was the right thing to do.
Wait until the time is right, and when you think it is, invest aggressively.
Remember that looking at historical share price trend (my additions – dividend yield trend & PE trend) are useful only in the sense that they provide you with some historical context for the current price. Remember that the past is no indication of likely future prices.
What they do provide you with is a view as to whether, in a historical context, the current price is above or below the historical average.
How you interpret that and what weight you apply to it is up to you and you should form your judgment in connection with a range of other indicators and wider research.

VOLATILITY AND CHAOS ARE GOOD FOR THE INVESTOR
During the late 2008 and 2009, share markets across the world starting to behave in a very volatile way as the wide –debated economic crisis started to hit home. Throughout 2010 we have already seen this volatility continue as debt crisis impacts on confidence. This impacted on many different types of companies, and continues to do so, but companies in the motor industry and the finance sector were affected particularly strongly. However, just because GM. May be making too many cars that people don’t seem to want or at least are willing to buy, doesn’t mean a company such as Harley Davidson should be viewed in the same context. In the motor industry it is, but a very different animal it is too, and this had seemingly escaped the notice of most other people. I could sense that an opportunity may be on the horizon.

People were behaving irrationally and a company that was superb in my view was starting to become very under- value, and it wasn’t only me who noticed. When the share price in early 2009, I invested in it aggressively and my 5-year wait was over

VERY LONGTERM INVESTOR (I would still sell if I think the stock is “over value”).

Within a few months the share price had risen significantly and in early 2010 had risen to $27-$30 range. As a LONGTERM investor, I am not selling my shares in this company despite the fact that I could have realized a significant profit. My holding period is always intended to be forever and this would change only under a particular set of exceptional circumstances. In the past ten years on only several occasions, and all of those occurred during 2008 and were related to the finance sector. I think that Harley Davidson shares are worth far more than the current $23 price. If I could, I would buy the whole company.

TAKING A LONG-TERM VIEW
Chances are if you are not sure about investing in a company for ten years, it is probably not the right stock for you. An investor takes a long-term view, of more than five years. If your horizon is generally less than that then you may be more suited to speculation than investing. Once again there is nothing wrong with that, but it is a quite different approach from the one advocated here.
I waited a long time to buy Harley Davidson shares and despite waiting to buy them, I didn’t until the time was, for me, right. This required discipline and faith in my conviction that the opportunity would arrive during a long period of time where there was no evidence whatever that the opportunity would come. I also had worked out what for me was an appropriate or good price for this company.

Question?
wow! Fantastic!
Wonder anyone here has done something like this chap?

[giraffe]

Reading the old threads from Wallstraits rekindles my thoughts when I first started off buying shares mindlessly, having to pay a hefty fee to the market. Fortunately, I chanced upon Wallstraits and since then I have been a silent reader. Have enjoyed reading most of the threads. Was disappointed when Wallstraits and subsequently Afralug went defunct. Fortunately, some like minds have established Valuebuddies. Just want to thank the people behind this effort and all the contributors. I have learnt immensely from most of you.

[d.o.g.]

Here is a newbie question: How do u all pick ur initial selection of companies for analysis? With the aid of publications? If so, do you mind listing a few?

The most effective way that I know of is to start with "A". There are only 700-odd companies on the SGX so it won't take that long, a couple of months if you are devoting 1-2 hours a day. You will get faster as you get more practice.

Learn to analyse by elimination: first remove companies that are losing money, heavily indebted, very small etc. This will only take 1-2 minutes per company and should cut the list down by at least 50%.

Of the remainder you can then try to understand what sort of business they are in. If you don't understand their business or think it's a lousy one, cut them out too. That should leave you with less than 10% of the initial list i.e. about 70 companies.

Now the real work begins. From these 70, after thorough analysis you should be able to pick 10-20 that would be decent investments i.e. the business is OK, the management is OK, and the price is also OK.

Ta-da! You just created your own investment portfolio.

If you are unwilling or unable to put aside the time to screen the companies this way, consider an index fund, ETF or a professional fund manager.

There is a "Shares Investment" book that costs $6 and supposedly lists the SGX companies by PE, ROE, P/B, dividend yield etc. I flipped through a few editions and never found it useful because invariably the companies that came up on the list were distortions e.g. property companies on the low PE list, companies booking extraordinary gains on the ROE list etc.

POEMS also has a stock screener where you can screen by PE, P/B, ROE, yield etc. But it suffers from the same problem as the "Shares Investment" book, namely that it's mostly companies in extraordinary situations which show up on the list.

Note: if you think you can shortcut the process by only analyzing the index stocks, think again. With index stocks you will not learn much because the index stocks are generally very large companies with different businesses which complicate the analysis.

In fact you will not save much time on analysis either e.g. Keppel Corp is made up of the rigbuilding, property and engineering businesses. So it's really 3 companies in one, and 3 times the analysis work. Ditto for Singtel - it's all telco but there is the Singapore market, Australia market, India market and Thai market. For Starhub there is cable TV, internet broadband and mobile. For Capitaland there is property development, property investment, and property management. For CDL there is property development, property investment, property management and hotels. For the banks there is exposure to different sectors and you have no idea about loan quality. Jardine C&C's Astra unit has plantations, motorcycles, and highways. And so on.

However, if you are a defensive/conservative investor and are willing to accept the market return, by all means limit your selection to the index stocks. But you must accept that your returns will then be very similar to the index, and that the only way you can do "better than average" is to buy only during a recession, and at all other times (especially during a bull market) you should not put new money into the market.

Average, by the way, is not bad at all. Most people who try to beat the market fail. So getting the market return is a pretty decent result, especially if you do not spend any time picking stocks i.e. you use an index fund or ETF.

Of course, YMMV.