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Investment Philosophy

Having an investment philosophy is of utmost importance and it is even more important to follow it through thick and thin. I set up for myself certain principles before I invested any money in stock market since last year. The principles are rather simple which are to find good companies that give consistent, high and growing dividends. High capital growth is not a must but a bonus if the stock price appreciates a lot.

The principles are simple but powerful as I know the returns from dividends alone will be enormous if combined with the effect of compounding (refer to 1 and 2). My goal is to start at at least 5% annual yield that could beat the rate offered by most of the banks’ fixed deposit.

It is too easy to get distracted and lose faith in my investment philosophy since the process is extremely slow and boring and it takes very long time (probably decades!) to see the effect. I questioned myself about my investment philosophy not once but many times. However, every time I receive the dividend from my investment, my regain confident in it. The money that I receive from dividend is very real and it reminds me of my investment goal and it encourages me to keep going.

Herding effect

Don’t fall victim to herding effect! Recently, I discuss a lot with colleagues about investment. I found that it is really easily to fall into the herding trap. People around you will influence you doing things that you have no idea of.

It is quite tempting to follow others who happen to buy stocks that are in the rising trend. You feel like you are losing out by not getting in with the crowd. However, follow up trend has 2 extreme consequences: either the price a) continue to go up or b) reverse the direction after you buy the stock. From a probabilistic perspective, both cases have equal chance of happening since in the short-term, the stock price is not predictable. If case a) happens to you, you feel great. If case b) happens to you, you feel terrible.

Herding effect will only affect you if you don’t know what you are doing. You are easily influenced by others to make decisions that you don’t fully understand. Therefore it is very essential to have your investment philosophy in place to guide your decisions else you will get lost.  Use an “inner” scorecard, as Warren Buffett points out, not outer scorecard to judge your decisions. “You are neither right or wrong just because the crowd disagrees with you.” Have your facts right and make your own decision according to your investment philosophy. Follow your own rules and you should be OK.

Probably the most effective way to avoid herd behavior is to stay away from the crowd or at least discuss less with others about investment especially those have different investment philosophy. It is better to be a loner than a blind follower in investing.

Financial Freedom

There is quite a number of people achieved financial independence using dividend investment alone.

Here is a list of people who are dividend investors:

You can get a lot of inspirations by reading their blog.

Snippet: Preference between itradecimb vs hlebroking

After trying for more than a few months both stock trading platforms: itradecimb (my stock account 1) and hlebroking (my stock account 2), I finally come to a conclusion which one to keep as I want to simplify my investment experience.

For hlebroking, the greatest disadvantage is that the limit order is only valid for one day. You would need to check everyday whether your order is filled and if not you will need to reset it. One way or another, it causes you to over trading which I am not comfortable of.

Secondly, I get far too many misinformation from the broker agent: incorrect maximum deposit amount with Maybank (she said RM 25k but I successfully transferred RM 30k), transaction fee for buying and selling in one day (she said they will be counted as single transaction but in fact it is not as told by my colleague), rights shares OR, …

Thirdly, the web trading platform is only compatible with IE and IE only as of now. The mobile app is also causing me a lot of trouble because I cannot use it on both my iPhone and iPad. I can only choose one.

The greatest advantage of hlebroking would be to make large one time transaction due to the lower transaction cost. However, since I don’t have large heritage to do that kind of transaction, I am not benefit much from it.

I will continue with itradecimb from 2014 onwards. It brings me peace of mind with 14 day limit order which I can set and forget. I just have to live with the additional transaction cost. I can also explore foreign markets with it.

Conclusion

One last thing I want to remind myself is that: Don’t get too serious about the daily price movement or paper P/L. Over short-term, the price movement is very random. I need to focus on the performance of the companies over longer term at least 3 to 5 years.

Stick to your philosophy and have trust in it since it is proven by many. Follow Buffett’s wisdom. Don’t waste the knowledge acquired reading so many investment books.