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I just celebrated my birthday this month. I’m now officially a year away from hitting 40! 20 years ago, my birthday celebrations would have been hitting the bars and usually ending up drunk somewhere past midnight. Today, I spend my birthday evening telling my boys to: “Hey get down the sofa!”
“Don’t keep blowing papa’s candle!”
Just like how my birthdays have evolved over the years, my investing strategy has evolved too. I’ve been investing for 16 years now. My university roommate got me into the game, lending me the first book called the Intelligent Investor by Benjamin Graham. Soon, I was hooked. I bought my first stock in 2010. Back then, I spent most of my evenings in my university hall room scribbling notes about investing that I had read online and books. The advice when I started out was simple: buy good companies, never overpay. But I was stubborn as an ox. I thought I could play it even better by going after all the complex strategies popular hedge fund managers used. For years, I was picking small, risky stocks - promised massive growth in the quickest amount of time. Warren Buffett calls this cigar butt investing. Like finding a discarded cigar butt on the street - unattractive but offering one last “free puff” of profits. Back then, I think my average return was around 69%. But I bought and sold each stock quickly. Over the next few years, that’s how my investing went: few huge gains, lots of volatility, lots of churn in my portfolio. What’s worse was my fair share of losses, when a few of them went terribly wrong. It was tiring. To be honest, it might seem you’re winning big by doing a lot of trading - Record big gains on your excel spreadsheet every now and then. But after factoring the few big losses I had, I realized the total returns just weren't worth the risk taking and huge amount of time spent. By then I was working, dating (my current wife) and studying for my CFA Program. My heart would beat with anxiety every time I watched my stock positions. I’m looking for a lopsided payoff with minimal riskI haven’t completely quit my old strategy. I still enjoy the thrill and excitement of picking these cigars butts. But my strategy has evolved. Today, my investing strategy isn’t very hard: I try to accumulate massive wealth by building a compounding machine for the long-term. In general, I’m looking for a lopsided payoff with minimal risk - focusing on growing capital and dividends. For example, I’ve made more than 200% price gains in DBS Group since my first purchase in 2016. Today, I’m sitting on a 20% dividend yield on my average purchase cost. Some of my other best winners include China Mobile (+62% price gains), CNOOC (+140% price gains), Interactive Brokers (+306% price gains), Sheng Siong (103% price gains) and so on. It was truly picking high-quality businesses for the long-term. My sharpest sword? Good research. I still keep the Intelligent Investor on my book shelf today. I still consider myself an old-fashioned value investor. What I try to do is simple: spot undervalued gems early by investing in high-quality, profitable businesses trading at a discount to their intrinsic value. Sometimes these stocks may have been temporarily overlooked. Sometimes, they are just unloved. That means all my stock picks are based on understanding a company’s fundamental value before I put a single dollar into it. To a large extent, these also include companies that are favoured by Warren Buffett - durable companies with a strong economic moat. Have a margin of safetyUltimately, it’s important for me to apply the concept of a margin of safety. I learnt this from reading the Intelligent Investor. From my time as an emerging market analyst during my banking days taught me to always protect my downside. This avoids permanent loss of capital - keeping me in the game long enough to take advantage of compounding. I’m not limited by geography. At the moment, I put my attention in China, Hong Kong, the US and Singapore markets. But I’m not afraid to take advantage of high potential stock ideas in emerging markets. To me, sheer, outrageous value is enough. Because of the hard lessons I learnt early on, risk management is number one priority. I manage my risk by investing in a well-diversified stock portfolio. And I remain fully invested most of the time. Why I invest for dividendsYou may disagree with me but I’ve an obsession with dividends. Why? You see, over the years I’ve also become more lazy. I no longer want to keep trading in and out of stocks just to grow my wealth. Whether I’m travelling with my family, spending time with people I love, or being busy with life… I want my capital to keep working quietly in the background without my constant attention. That’s the power of dividends. You collect the paycheck month after month, year after year. What’s more, rising dividends create rising stock prices. This is because before a decision to raise dividends, management must believe there are prospects for higher earnings in the future. Sustainable, higher earnings means larger shareholder returns. This forces share prices to go higher. As such, you get “double compounding” when you invest in stocks that pay rising dividends. I’ll never forget this chart by the Hartford Funds and Ned Davis Research, A $100 investment in the 1970s would have grown to more than $14,000 over the next 50 years. Simply put, the stock that pays dividends is worth a lot more as its dividends paid out increases over time. Of course, I’ll happily mix my strategy with the occasional cigar butts when I find one, because it’s still exciting for me. Who doesn’t? It’s speculative but the rewards are immense. Just like age, my investing strategy is all about compounding my wealth for long holding periods. Because this not only allows you to compound your capital, you get to keep your dividend income along the way. What's your investing strategy? Hit "reply" to let me know - I'm curious! P.S. Also, wishing all mommies a HAPPY MOTHER'S DAY! Sometimes, investing can be simple. Willie Keng, CFA Founder, dividendtitan.com P.P.S. Like this issue? 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