Monday, November 10, 2014

Random thoughts: Advice for a close friend who wanted to start investing

Recently, I talked to a close friend about financial journey, how I seem to be taking 2 steps forward and 1 step back.

She becomes very interested in the concept of investing and compounding returns. She told me she was sold a few times before about the idea and was worried that she get conned by salesmen.

There is so much to explain about investment, so I Think hard how to explain the most important quickly. I thought my explanation to her might be useful to beginners.

How it works:

Assume a 6% return of dividends (Not capital gain), and reinvestment of that return yearly, it will take 12 years to double the capital base.

Build up a base portfolio of say 50K first, keep the rest of the money as warchest to enter the market as correction happens, or bear returns.

I highlighted 2 important criteria:

1) The sustainability of  dividends, the suitability of Company is a no brainer.

2) The ability to accept paper loss of more than 50% without panic, or rushing to sell.

With skills and luck, one can expect returns above 6%, but better not be ambitious at the beginning at stick with 5% and thereabout. 

most important question: in a severe bear market is this one company I would average down, or at least leave it as it is to wait for the sun as you collect "smaller dividends" as you wait 

She ask me to highlight companies, I ask her to do some research on her own.

She surf some blogs and ask me about Sembcorp Industries, LOL. Vested interest, conflict of interest, LOL. Luckily, she told me she get the idea from ASSI, at least I know AK is no con man and is one lucky man. LOL

I told her I can meet her to give my details. In my opinion,

It is important to learn:
Balance sheet, debt ratio

Cash flow, ESP FCF.

Profit resilence.

With these, u know u got a rather sound business.

The super tricky part is that of valuation. 

1) basic is yield, DCF and PE

Also, probability of growth. This is what people say is like betting. 

Lastly, read valuebuddies and investment book. 

Last advice, stick to the plan. Try new strategies only with excess money, and do not be tempted by CFD, penny trading, options, ES and warrants. 

12 comments:

  1. Hi Sillyinvestor,

    Does your friend know about this blog? ;p

    When friends who are beginners ask me about investments, I like to refer them to "The Intelligent Investor". The first few chapters are not intimidating and are the most important. Does she want to be a defensive investor or aggressive investor?

    If she knows what she wants out of investing and knows herself well, she might even not need to know much about FCF, balance sheets or DCF.

    ReplyDelete
    Replies
    1. Hmm...

      I think DCF once u share the spread sheet is not difficult.

      As for intelligent investor, I agree, chapter 8 and 20 is the crown jewel of the goldmine !!

      But I think it is over the head for her now.

      Ya, I think she stumble upon mine and guess it was me ...LOL

      Delete
  2. Look like more Star bloggers are into SCI.

    :-)

    ReplyDelete
    Replies
    1. Oh that oatmeal guy is definutely one star blogger althought he wouldn't wan to be call that

      Delete
  3. Hi sillyinvestor
    i dont know much abt fcf roe dcf profit relience.
    Too complicated.
    i look at dividend pb pe in depth. So far doing ok.
    do visit my blog.
    u got me started in blogging
    :)

    ReplyDelete
    Replies
    1. Paullow

      How are u getting on? I went to your blog, the long term dividend investung theme still evident LOL.

      Did you get your blog aggregate at finance.sg, easier to follow. I thought I created a link to your blog, didn't noticed the link is gone until now.

      Delete
    2. Hi. Thanks for replying. Life's more n more boring now that i am more n more like playing lego
      albeit dividends as lego blocks....another idea for another post...lol
      How have u been? Hope all's fine.
      Paullow

      Delete
    3. Hi Paul,

      I am good, I am still sticking to my bread and cheese breakfast regime; saving a lot of money! LOL, but now because I dun use feel poor to do it, the little voice of buying this or that is louder.

      But it's ok. Better this way, happier LOL.

      I am in balance again !! Yeah !!

      Dun even feel anything when u see use dividend as Lego blocks, just 1 week ago, most prob voice will be like" wow, so good, see u loser..!! " hehehe

      Delete
  4. Hi SI,

    6% dividend yield is a tad ambitious in the current environment. Even most REITs I checked do not have yields above that number.

    Hope your friend will put in the effort to understand the business of things. My friends tend to ask me straight for stock recommendations. =.="

    ReplyDelete
    Replies
    1. S-reit investor, it is possible, although not possible every year.

      3 ways to get it.

      1) Mr Market bad mood and offer discount to everyone.
      2) Growth allow a company to raise dividends and you got in early.
      3) Mispriced investment.

      1) is not around, although it does give a reasonable yield to get for Sembcorp and ST engineering...

      2) Think about singapore shipping, although it may or may not translate to growth.

      3) Think about APTT, it yield close to 11% when I bought it, another favourite is CMP

      Delete
  5. Hi SI,

    My usual experience with pple is that they will give up if h bombard them with so mwhy technical stuff. So these days, I tell them to do this and that, set a meeting (can be online) , then we'll discuss about it . Once done, we'll move on and I'll assign more things. More structured and also suss out pple who are half interested so they won't waste time and effort.

    Its not easy to explain all of this, so I require reciprocal effort by the other party before I continue lol

    ReplyDelete
    Replies
    1. Lol LP,

      A teacher who seek to overwhelm usually overwhelm himself ...

      Hmm... I set up a meeting, no rwsponse yet... Lol

      Delete