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When trading or investing in the financial markets, we need to have a plan. If we base our decisions on feelings (like greed or fear), a hot stock tip or what’s in the news, heartbreak is inevitable.
One investor who definitely has a plan for his investments is David Kuo. Many of you may know him from his time heading Motley Fool Singapore, and his new investment website – The Smart Investor.
Articles on The Smart Investor is exactly what we expect from a David Kuo-led initiative – well-explained articles on blue chip companies, dividend-paying companies, REITs and more. David also writes his weekly Kuo’s Smart Take column detailing his thoughts.
The Smart Investor also offers insights on building and managing resilient portfolios that David Kuo and his team have invested real money into. These are The Smart Dividend Portfolio, The Smart Investor All-Stars Portfolio and a brand new David Kuo’s Income Portfolio.
In this edition of #MyFirstLoss, we caught up with David to find out how his first loss molded his investing philosophy and why he decided to start The Smart Investor.
Dinesh Dayani (Dinesh): I always ask the same question to everyone: do you remember your first ever loss?
David Kuo (David): I will never forget it.
It was a UK blue chip called General Electric Company (GEC), not to be confused with General Electric in the US. GEC was a massive British conglomerate that at one time was almost as big as British Petroleum (BP) and Shell in size, and one of the UK’s largest employer. At the helm of the company was a man called Lord Weinstock, who popularised the phrase “Cash is King”. Weinstock was so obsessed with cash that he would, reportedly, ask for a bank statement to be placed on his desk every morning.
When Weinstock retired, he was succeeded by Lord Simpson who restructured the entire business to exploit the growth of the internet. So, out went the reliable home appliances businesses and in came a string of ill-advised acquisitions. The cash pile was quickly replaced by a pile of debt – which ultimately sank the company.
This should be a reminder to every investor that we need to follow a company’s story when we invest. We should stand by our investment if the story remains the same. But think twice if the story has changed.
Dinesh: After being in the industry for such a long time, what are some common mistakes you see new investors making?
David: Without question it is impatience. Many investors expect instant gratification. They want a share to rise shortly after they have bought it, so they can cash out and notch up some capital gains. Perhaps it is because looking up share prices is easy to do, which is why they gauge their investing success on how much it has risen. But there are so many other ways that we can use to measure our success. Growth investors can look at earnings per share, whilst income investors can look at dividends.
Another common mistake is investing with money that they might need within the next five years. Thing is, many people know that the stock market is the right place to invest their money if they want to achieve returns that can outperform inflation. But whilst their brains may tell them it is the right thing to do, they don’t always have the stomach to endure sudden drops in the market.
If you are someone who is not comfortable with risk, then the stock market may not be the right investment for you. But it means you have to save even more money for your retirement than someone who is prepared to accept that investing in shares is riskier. After all, the greater the risk, the greater the return. But if you are still determined to invest in shares, then, perhaps, consider setting up an automatic fixed monthly investment in an index tracker that tracks the Singapore market. When the market is high, you would buy fewer units. But when the market is low you would get more units. After it has been set up, don’t be tempted to look at it for at least five years.
Dinesh: Is this why you started The Smart Investor after heading Motley Fool Singapore for almost a decade?
David: We were doing well in Singapore, and those who followed our philosophy of buy-to-hold good shares should have done well. Unfortunately, certain events beyond our control stopped us in our tracks.
It was disappointing to bring down the curtain. But our work in Singapore was far from complete. There are still many investors who could benefit from our tried-and-tested strategy of identifying good companies that can be combined into existing portfolios. Investing should be an obsession and it shouldn’t even be exciting. But it can be fun and profitable if we are smart. So, you could say that I have gone from being a Fool to being Smart.
Dinesh: Tell me more about the portfolios you have built?
David: The Smart Dividend Portfolio is our flagship service that introduces investors to the way we select income shares. It is a real-money portfolio. There is nothing quite like putting money where your mouth is. It separates the men from the boys. All too often, analysts will talk about the merits and detractions of particular shares. But they don’t have any skin in the game.
With The Smart Divided Portfolio, our analysts explain the reasons why they like a share, and why they will be buying it. What’s more, the shares in this portfolio are only drawn from Singapore-listed companies. It hopes to show that there are more than enough shares on the Singapore market to generate a good return for investors.
I’ve also started the David Kuo Income Portfolios (DKIP), which is broken into three separate portfolios to achieve high levels of income, growth with low volatility by continually reinvesting the dividends. All three are real-money portfolios – I invest in them. Members are invited to challenge and question the picks at regular webinars.
The first portfolio is KIP that is focused on property. It was designed to show investors that there is a viable alternative to investing in physical properties. Instead of rental yields, KIP invests in income-generating, property-related shares that include REITs from different countries, developers and even hotels to generate rising dividends.
The second is Malaysia Money Machines that only invests in dividend-paying shares listed on Bursa Malaysia. It is an eclectic mix of income shares that include banks, insurers, REITs and manufacturers. Its purpose is to tap into the growth of Southeast Asia’s fifth largest economy.
The third portfolio, Asian Consumer Portfolio (ACP), only started life a few months ago. Its objective is to capitalise on the rising standard of living of Asian households. Some Asian countries are today where Singapore was decades ago. But they look at Singapore as a role model of where they want to be, eventually. So, ACP invests in those companies that could be part of their journeys.
Dinesh: You wrote about investor overreaction in a recent article. Today, there is still uncertainty overhanging the US election, but there are also promising vaccine developments in the news, and there will be more updates in the future – how should investors react to positive or negative news?
David: Good companies can survive in both tough and easier times. They can survive regardless of who is occupying The White House. They can survive whatever happens with interest rates. They can even survive whatever is happening in the global economy. In other words, they are survivors. So, long-term investors should always look for those good companies that will survive.
What is interesting is that market turbulence can impact good and bad companies, alike. In a market sell-off, the good gets thrown out with the bad. That provides an opportunity for serious investors to pick up the shares of good companies that have fallen relative to their intrinsic values. But to do that, we need to know what a good company looks like, and what its intrinsic value is.
Knowledge And Having A Plan Are Keys To Success
David made a loss in his first investment as he didn’t pay attention to the changing fundamentals of the stock. In hindsight, he realised there were red flags.
Regardless of whether we are trading or investing, knowledge of your investments will make a difference between success and failure. Fortunately, there are many avenues to gain knowledge today. Some online sources are absolutely free, with David’s The Smart Investor, DollarsAndSense or also IG’s Analyse and Learn tools, providing News and Trade ideas, Strategy and Planning content, a handy Economic Calendar and more.
David also offers investors a glimpse into his portfolios, equipping them with the knowledge of the reasons behind the investments they make. He also welcomes investors to question his decisions via webinars.
Similarly, IG also allows us to attend free finance and trading webinars to build a deeper understanding of trading and connects us to like-minded individuals to share trading opportunities and open their trade ideas up for debate via the IG Community.
When we invest, we need to look at the long-term. That is why in a previous interview with David, he shared that about 90% of his portfolio is in income and growth companies, with 10% set aside for short term speculative investments. David also mentions that one of the biggest mistakes investors make is seeking instant gratification when they invest in a share.
While this may feel like it applies only to investing and not trading, that’s not true. Trading requires a person to hone their skills and continue learning over time before they become successful. And ideally, the aim of both investing and trading is to make money, and not to get too excited about the trades we make.
If you are keen to try out trading but are unsure of how to get started, consider opening a demo account first. A demo account such as the one offered by IG allows you to practice trading with $200,000 in virtual funds. It also provides you with access to exclusive content on IG Academy where you can gain knowledge in trading on the financial markets before you put in actual money in your trades.