16 March 2016
The Right Combination For Your Portfolio
By David Kuo
You would have thought that ordering a cup of tea at a Kopitiam in Singapore should be fairly straight forward. It is, if you are familiar with the local vernacular.
So it helps to know your Teh from your Teh O from your Teh C from your Teh Kosong.
Once you have mastered the various permutations and combinations of “O”s, “C”s and “Kosongs”, you can relax, knowing that you should always have the right cuppa brew in front of you.
Temperamental investing
Building a portfolio of shares is a bit like that too.
Once you know your income from your growth from your value shares, you can begin to combine them in such a way that would be appropriate to your investing temperament.
Nobody, though, can actually tell you what your right temperament should be - just as no one should dictate to you how you should take your tea.
That is the beauty of building our own portfolios. We can combine them in such a way so that we can get exactly what we want.
Your choice
Some people might like a preponderance of income shares with a smattering of growth and value. Others might like it the other way around. The choice is yours, entirely.
But we do need to know the characteristics of each share; what each share actually does and how it can contribute to the overall performance of our portfolios over the long term.
Peter Lynch once said: “You have to know what you own, and why you own it. This baby is a cinch to go up doesn't count!”
Don’t fret
Unfortunately, many investors might not be aware of the types of shares they that have bought for their portfolios. That could be why they fret unnecessarily in times of extreme market volatility.
If they knew the story behind each share, they probably wouldn’t worry at all.
Income shares, for example, pay dividends, regardless of what is going on in the stock market. A volatile stock market doesn’t stop a company from writing out dividend cheques.
Consequently, investors who are true to the discipline of income investing should learn to embrace market volatility, rather than be unduly concerned when it happens.
Volatility in the market could even provide some great opportunities for us to buy more of the shares that we like at favourable prices. So rather than freaking out, we should be sitting down calmly assessing the bargains on offer.
Mad panic
Growth and value investors should do the same. A good growth company doesn’t stop growing just because traders are fleeing the market in a mad panic.
Peter Lynch, the legendary investor from Fidelity, also said: “When favourable cards turn up, add to your bet, and vice versa.” He is right.
The upshot is that investing should never be about being fixated by the daily price movements of the shares in your portfolio. Instead, it should be about monitoring closely the income stream that those companies are able to generate for you.
Unlike a share price, the income stream doesn't change from one minute to the next. In fact, good companies should be able to increase their income streams over time. The operative words are “over time”.
Powerful force
That is why - as Warren Buffett pointed - it is important to buy wonderful companies at fair prices, rather than to buy fair companies at wonderful prices.
The secret to successful investing is to sift out the fair companies from the wonderful ones. Then it is a question of waiting, patiently for the market to do something stupid.
And as to how long that could take, the answer is indefinitely. But you can always rely on the market to do something stupid. So order yourself a brew or two of your choice and wait. Mine's a Teh C Kosong!
Remember, we are not rewarded for being active in the market. Instead our rewards come from being right.
The right moment generally occurs when markets are down, not when they are up. When that happens, a combination of money and bravery can be a powerful force, for the patient investor.
Be sure to follow us on Facebook for the latest in Foolish investing.
You would have thought that ordering a cup of tea at a Kopitiam in Singapore should be fairly straight forward. It is, if you are familiar with the local vernacular.
So it helps to know your Teh from your Teh O from your Teh C from your Teh Kosong.
Once you have mastered the various permutations and combinations of “O”s, “C”s and “Kosongs”, you can relax, knowing that you should always have the right cuppa brew in front of you.
Temperamental investing
Building a portfolio of shares is a bit like that too.
Once you know your income from your growth from your value shares, you can begin to combine them in such a way that would be appropriate to your investing temperament.
Nobody, though, can actually tell you what your right temperament should be - just as no one should dictate to you how you should take your tea.
That is the beauty of building our own portfolios. We can combine them in such a way so that we can get exactly what we want.
Your choice
Some people might like a preponderance of income shares with a smattering of growth and value. Others might like it the other way around. The choice is yours, entirely.
But we do need to know the characteristics of each share; what each share actually does and how it can contribute to the overall performance of our portfolios over the long term.
Peter Lynch once said: “You have to know what you own, and why you own it. This baby is a cinch to go up doesn't count!”
Don’t fret
Unfortunately, many investors might not be aware of the types of shares they that have bought for their portfolios. That could be why they fret unnecessarily in times of extreme market volatility.
If they knew the story behind each share, they probably wouldn’t worry at all.
Income shares, for example, pay dividends, regardless of what is going on in the stock market. A volatile stock market doesn’t stop a company from writing out dividend cheques.
Consequently, investors who are true to the discipline of income investing should learn to embrace market volatility, rather than be unduly concerned when it happens.
Volatility in the market could even provide some great opportunities for us to buy more of the shares that we like at favourable prices. So rather than freaking out, we should be sitting down calmly assessing the bargains on offer.
Mad panic
Growth and value investors should do the same. A good growth company doesn’t stop growing just because traders are fleeing the market in a mad panic.
Peter Lynch, the legendary investor from Fidelity, also said: “When favourable cards turn up, add to your bet, and vice versa.” He is right.
The upshot is that investing should never be about being fixated by the daily price movements of the shares in your portfolio. Instead, it should be about monitoring closely the income stream that those companies are able to generate for you.
Unlike a share price, the income stream doesn't change from one minute to the next. In fact, good companies should be able to increase their income streams over time. The operative words are “over time”.
Powerful force
That is why - as Warren Buffett pointed - it is important to buy wonderful companies at fair prices, rather than to buy fair companies at wonderful prices.
The secret to successful investing is to sift out the fair companies from the wonderful ones. Then it is a question of waiting, patiently for the market to do something stupid.
And as to how long that could take, the answer is indefinitely. But you can always rely on the market to do something stupid. So order yourself a brew or two of your choice and wait. Mine's a Teh C Kosong!
Remember, we are not rewarded for being active in the market. Instead our rewards come from being right.
The right moment generally occurs when markets are down, not when they are up. When that happens, a combination of money and bravery can be a powerful force, for the patient investor.
Be sure to follow us on Facebook for the latest in Foolish investing.
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