I have been in the Philippine stock market for almost a year now. The reason why I put my money in the stock market is obviously to make money out of my already existing money that isn’t enough to re-invest again on real estate (OK fine, I call it play money, the money I am quite willing to lose). So I understood all the costs to trade: commissions, VAT, fees, etc. and their impact on my overall returns.
For the first 2 months, I am an active trader. Following some simple guidelines from Truly Rich Club’s stock recommendations, I also tried picking stocks of my own. Call it excitement or over-eagerness, I find myself staring at the monitor during trade hours, compromising my productivity at work. As if it’s not enough, I spend my weeknights practicing my charting skills, just to figure out whether this stock will go upwards or downwards, whatever.
Countless nights passed by and I realized that the more effort I put in charting and monitoring, the results aren’t that spectacular. You know why? Because the more trades I do, there’s only 1 who gains from it: the broker. Frequent trading has destroyed my returns. I have only helped my broker get revenues, that’s it.
Are you familiar with Law of Diminishing Returns? This is it.
At this point you may realize that the hidden cost is the commissions and the fees. Well, they are not.
TIME IS THE MOST VALUABLE COMMODITY
My financial mentor always tell me, “Time is the most important commodity, use it wisely.” I realized that for that couple of months trading, I have wasted a lot of my time. Imagine, 4-1/2 trading hours, + 2-3 hours of charting every weekday. That’s 6-7 hours daily, 30-35 hours a week. My returns-to-efforts ratio is in serious waste.
Then I chose to read The Intelligent Investor by Benjamin Graham, the father of value investing and the mentor of the greatest American investor Warren Buffet. This book has changed my whole perception in stocks, and I owe my success and knowledge in stocks now to “them”.
I focused on the fundamental approach of stock investing: buying stocks below its intrinsic value, backed by solid balance sheet numbers and good economic probability and “moat”. I learned to pick fantastic companies at a sensible price. It taught me to become a stock investor from a businessman’s point of view.
This kind of investing made me do all my homework before I actually buy the security. So that after that, I don’t have to worry about it anymore — as long as I bought it at a decent price (below its intrinsic value) with minimal downside and exceptional margin of safety. The homework itself is daunting, but I have learned a lot browsing through hundred pages of financial reports and balance sheets. Endless Excel spreadsheets are used to calculate all the financial ratios I need to know for a particular security. In return, I gained knowledge that I will never learn by spending those nights charting.
The result: I now spend less than an hour per week checking my stock holdings/portfolio. Compare that to 30 hours of week and I get 97% more time to do more productive things. True enough, for the past 8 months, I have finished several books and online courses about leadership, accounting, corporate finance, economics, business/entrepreneurship, investments, etc.
Had I continued my trading path, I won’t have time to do these.
Even better, I was able to free up time to resume my workout activities, and quality time with friends and loved ones. I am also able to make time for a couple of business startups that me and my fellow investors are venturing now.
How about my rewards? Since I have already picked up stocks from great and established companies, I am already in the “leave it and forget it” mode. The returns YTD are quite decent (since I have bought them at a very good price, not to mention the dividends). I was able to do it with 97% less time and less risk (through margin of safety). The effort (if measured in time spent per day) is also minimal as I only do my homework quarterly. Does this mean fundamentalists are lazy investors? No. There’s nothing lazy about studying balance sheets over and over again. They just get the job done at the right amount of time.
That extra time gave me enough information about economics and the reason why I was able to successfully “sidestep” my stock holdings into safer havens just before that big market correction started by Chinese stock market. Most didn’t see it coming that fast. As Warren Buffet always say, “Games are won by players who focus on the playing field, not the ones looking at the scoreboard.”
After the bloodshed, I was one of the most excited investors to go shopping for stocks with bargain prices. That’s what I call being defensively smart with your investments. I can forget about big gains if my downside safety is being compromised.
You see, more time for productive things means acquiring more learnings and more value to your skillbase. Thinking long term, this is the kind of time you and I want to have going further.
MONEY MUST WORK FOR YOU, NOT VICE VERSA
By staying away from active trading, I have successfully let my money work for me. One friend asked me “But isn’t investing itself already means money works for you?” I answered her in the nicest way possible:
“If you need to monitor your stocks the whole day just to create returns, you are still actually working for money.”
I can remember my mutual fund back in 2009. I rarely check on it but you can just imagine its fund return 6 years later. That’s what I call no sweat returns (I am not promoting mutual funds here by the way). That is money working for me without the need to look at my NAVPS update everyday.
DIFFERENT STROKES FOR DIFFERENT FOLKS
I am not against active trading, as I believe that people can still get rich with that. Fact is, each one has his/her investing style and principles. One is advised to study their craft and plan their investment moves very well. Most of my investor friends are very good stock market technical operators with awesome charting skills, and I am happy for their spectacular returns.
At the end of the day, it’s all about your risk appetite/tolerance and time available to do the thing not just for the present, but also in the future. In my case, I see myself running businesses / companies and the last thing I want to do is to spend the whole morning and afternoon doing 5-min charts just to pick up gains. Not that it’s a bad thing but I have other plans in my mind. Instead, I can simply buy preferred stocks from very good companies and receive my quarterly dividends. Who knows, I may have one of my companies enter into an IPO — and that’s the big! Now those traders will be going for the stocks owned by my company.
So much for the 97% more time I had in my hands and used it well. So much for the hidden, intangible cost that I am able to save in the long run. Wisdom is looking at the bigger picture and figuring out the overall risk-reward you are willing to give for a successful venture.