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.