I am a follower of your blogs & postings in i3investor and I like what you wrote.
I have a 25-year-old son who has been in the rat race for 2 years and I would very much like him to pick up investing skills while young. How do you charge?
Appreciate a reply from you.
I had read through the details you sent and actually in the middle of discussion with my children on their participation to your course. Both my elder children are currently studying in private university, one studying finance and marketing and another one studying music.
My objective for their participation at this young age is to generate their awareness and interest into acquiring this investment knowledge and skill as well as to enable them to create a steady income pipeline from investment by taking action plan after the course and to achieve a successful, meaningful and better living style.] HS
First a clarification. The saying above, “I Always Knew I was Going to be Rich” is from Warren Buffett, not me. I did not say I am rich.
How lucky the children above are! I wish my parents had done that for me when I was at that age. Then I am pretty sure I could say what Warren had said. Yes, I really believe so. It is not because one will automatically become very rich in a year, 10 years or even 20 years, following some investing methods, any method for that matter. But, imagine with scores of years for the children to build up their long term wealth, with the eighth wonder of the world, the power of compounding, and a proven and plausible way of investing with higher probability of success, the sky is the limit.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein
Power of compounding
Professor Jeremy Siegel, in his article, “Stocks for the long run”, made a study of the long-term returns of stocks at various periods from 1871 to 2012 in the United States. For a 141-year period from 1871-2012 in the USA, stocks’ total real annual return including dividend yield and after adjusting for inflation of 3% is 6.6%, or a gross return of 9.6%. The return in most of the developed and developing countries in the world do not differ much, including that of KLSE.
A young person starting work at the age of 23 who saves and invests $1000 a month, slowly increasing according to the increase of salary of 4%, in the stock market for a long term horizon yielding 9.6% a year will accumulate a total of $5.5m by the time he retires at the age of 60.
What if he can compound it at a higher rate of return? How to get a higher return with little risk?
The Super Investors of Graham and Doddsville
In a paper titled “The Super Investors of Graham and Doddsville”, Warren Buffet showed the track records of each of nine disciples of Benjamin Graham showing that they all generated annual compounded returns of between 18% and 29% over track records lasting between 13 to 28 years investing in the equity markets over a long period of time, out-performing the broad market by wide margins. Let’s have a look at their profit history as shown in Table 1 below.
Table 1: Returns of the Super Investors of Graham and Dodd
All the above investors came from just one school of thought in investing, the principles and methodologies of fundamental value investing (FVI). Their performances were well documented.
Take for example of the investing experience of Walter Schloss who had made a CAR of 21.3% over a 28 years investing period. The young person above who can save and invest following Schloss’s simple investing methodology for 28 years would have accumulated a whopping sum of $71m by the time he reaches 60 years old!
More recently, more super investors such as Joel Greenblatt, Seth Klarmen, Howard Marks, Mohnish Pabrai, Peter Lynch and many other fundamental value investing fund managers have all generated high return of over 20% CAR over an extended period of time, making billions for themselves and their investors.
What about long-term investing in Bursa? Why are there so many investors, some seemingly very experienced investors say it is not advisable to invest in individual stocks listed in Bursa for more than three years? Do they have statistical significant results to prove that?
I really don’t know about this too as there is no academic research carried out on this, unlike in the US and other more developed markets. What I can do is to do a simplistic back testing on some stocks listed in Bursa. I would use those stocks I have had in the two established portfolios of mine in i3investor about three years ago, and back test them for a longer period of 10 years, and see if holding them for 10 years can provide a good compounded return.
Ten-year compounded return of some stocks in Bursa
Table 2 in the Appendix shows the returns of the individual stocks in the combined portfolio of 19 stocks invested from 1st March 2006 to 29th February 2016. The 10-year period of study is reasonable representative as it has included a complete cycle of boom and bust in 2009.
A few stocks have shorter listing history and the actual shorter periods of listing are used. Some, for example Jobstreet, has no complete records and partial and shorter records were used. The share price data were obtained from the adjusted prices given by Yahoo Finance. It is assumed that a total of RM100000 was invested in equal amount for each of the 19 stocks in the portfolio.
In this 10-year period, KLCI has increased by 80%, or a compounded growth rate, CAR, of 6%, an underperformance compared to the historical long-term return of about CAR of 10%.
However, the portfolio of the 19 stocks has returned 470%, or a CAR of 24.4% over the 10-year period. Seventeen out of the nineteen stocks made positive returns, ranging from a low of 49% for Plenitude to a high of 1843% for SKP Resources. Four of them are 10-baggers; SKP Resources (+1843%), Datasonic (+1675%), Pintaras Jaya (+1424%), and CBIP (+1005%). The CAR of these 10-baggers range from 27.2% to 34.5% for those stocks which have more than 10 years’ records.
What is the risk in investing in these stocks for the long-term?
There are only two losers; Pantech and Fibon, with only a minimal loss of only 22%, and one other under-performer in Plenitude, which only managed to garner a cumulative return of 49% for the last ten years, underperforming the broad market of 80%.
So who say one cannot invest in Bursa stocks for more than 3 years for compounding return?
The above two parents who have encouraged their children to learn about fundamental investing, I consider super parents, but not yet until their children have “graduated” from my course, or other courses in FVI. Why? It is not easy. It is not easy not because those stuff are difficult but the contrary.
First, I can’t even convince my children, two of them are accountants, to learn about FVI. Three of my high school friends, had enrolled their children to learn about FVI from me, but just in the dinner three days ago, they told me they were too busy to learn because of their demanding career. A number of my course participants had also enrolled their children to the course, but I hardly heard of them discussing or asking in our forums, all for the same reason; no commitment, no interest, or too busy. Can’t blame them, it is a rat race out there.
I have responded to “Mum’s email and thought that she would quickly enrolled her son to learn from me on the FVI. However, I have not heard from Mum since. That was more than a week ago. I think it may not be the money as it is just a meagre sum. Most probably she can’t convince her son to spend some time to learn. Who cares about FVI? What use is that? I don’t have time!
I have a couple of very close University mates whom I also used to go minum occasionally. They are very successful in their career and they were able to send their children studying overseas full time and graduated as professionals. When I emphasize the need to convince their children to learn about investing, they responded as not necessary, because they will be rich from their career. Probably so, not until they get itchy and start investing without the proper knowledge in investing, I thought. That will be my next topic.
My question is, isn’t building long term wealth as important if not more important from your work? Apparently none agree with me.
But actually we can’t blame the children, almost all my friends as parents are also not willing to spend time and effort learning FVI themselves, although they kept on telling me they agree with me that FVI is important. Most of them simply have no interest. Some may even laugh at me what this FVI is, like some of them in i3investor do to me. Yes, I strongly believe FVI is very important for financial success in the long term. I have no doubt about it.
“value investing is either.... You either get it or you don't.” Seth Klarmen
Our school and university curriculum do not teach us and our children about personal finance and investing, but this, in my opinion, is very important for our financial future.
We as parents should provide some proper guidance to our children in their personal finance in order for them to be successful in their financial future.
It is not that easy though as first of all, many of us as parents are not well equipped with the awareness and knowledge of personal finance and investing. Few have any interest in FVI or even believe in FVI although I have given all the reasons and provided with evidences that FVI had worked and will continue to work. Our children are also very busy in their work and career. Getting our children to be interested is already a big chore.
But what other choice we have in order for them to have good financial future, more so for avoiding the pitfalls in investing? This is something we as parents must ponder and wonder about, deeply.
For those parents (or not parents) who are keen to equip themselves with the proper personal finance and investing knowledge, and wish to encourage their children to do the same, there are many resources out there, one of them is with the email below who have tried to train participants in a structured manner.
K C Chong
Table 2: 10 years return of some stocks in Bursa from 1st March 2006 to 29th February 2016