Welcome to 2020! As we head into a new decade, it’s easy to get carried away with the optimism that every new year brings. We have all our resolutions jotted down (Ok, no pineapple tarts this lunar new year) and the goals we want to reach in 12 months’ time.
However, we all know that many resolutions fall by the wayside pretty soon (OMG, these pineapple tarts are delicious!), and the main reason for that is because we don’t set clear and definable targets that tell us we’re actually getting closer to our goals.
‘What you don’t measure, you can’t improve.’ – Peter Drucker
So in this article, besides just sharing resolutions about how we can all become better investors in 2020, I’m also going to set simple targets you can follow to help you on your way. These simple resolutions may be most useful if you’re a beginner in the stock market, but they also serve as timely reminders for those of us who are more seasoned investors.
So here are five important resolutions to stick to become a better investor in 2020:
1. Save money, lots of it
While investing invariably requires a good amount of research and analysis to be successful at it, we often overlook the very first step when it comes to investing – your ability to save money. There’s really not much point reading all the books, poring over charts, or learning about key financial ratios when you don’t even have the money to invest in the first place.
If you’re having trouble saving money, then now may be a good time to re-look your spending habits and where your money is going. Is it because you’re spending too much on shopping and entertainment? Is it because you’re still paying sky-high interest payments on your credit card debt? Or is it because you keep buying extra lives, colour bombs, and lollipop hammers because you’re just not very good at Candy Crush?
‘It’s not your salary that makes you rich; it’s your spending habits.’ – Charles A. Jaffe
If you’re overspending and it’s hampering your ability to save money every month, maybe it’s time you take a step back and ask yourself whether it’s worth putting off your financial security for. Of course, if your budget is currently stretched because of health matters or other emergencies, then that’s a different story altogether. But if not, then the first step toward becoming a successful investor is to start saving. How much? Just saving $11 a day can make you a millionaire.
2. Pick an investment framework – and stick with it
Once you have saved up an investible pool of funds, it’s important to know what to do with it and how to safely invest your money for the long term. As bad as not saving is, saving and then losing all your hard-earned savings is a going to feel a lot worse!
So make sure you educate yourself on how to do research and analysis on great companies, read financial statements, calculate a stock’s intrinsic value, and manage your risk. For that, you need an investment framework – a step-by-step process you can follow to help you find the best stock investments for your portfolio.
For us, we use a framework called the Investment Quadrant which focuses on four areas of a company: its business model, management team, financial performance, and stock valuation. A company must pass all the minimum criteria and benchmarks before we even consider adding it to our portfolio.
Without a clear and logical investment framework, it’s easy to fall into the trap of making decisions based on your emotions. For example, if you bought a stock simply because you were afraid that you’d miss out on its potential price gains, then what happened was that you acted on your emotion of greed. And if you sold a stock only because you were afraid that its price would keep falling lower, you also acted on your emotion of fear. This is why many investors end up buying high and selling low. So to avoid scenarios where you might be swayed by your emotions, it’s important to have an investment process that relies on hard facts and data to help you make informed decisions.
If you’re interested to learn our investment framework, you can check out Dividend Machines – which focuses on dividend investing for passive income, or Investment Quadrant – which focuses on value-growth investing for capital gains.
But you don’t necessarily have to follow our methods; whatever framework you use, make sure you agree with its investment process — and stick with it if it’s giving you results.
3. Read annual reports
Before you invest in any stock, it’s important to read the annual report to give yourself a comprehensive assessment of a company. The annual report gives you an explanation of the company’s business operations, its risks, corporate governance, financial performance, and more.
However, reading the annual report doesn’t stop the moment you buy a stock, it’s important to continue reading every annual report that’s published to keep track of your investment. The key sections to read and focus on include:
- Chairman/CEO’s message which gives you an overview of the company’s performance and the outlook ahead
- Business which gives you an explanation and updates for each business segment’s operations
- Risk factors which lists the key risks that could affect the company in the future
- Financial data which includes the income/cash flow statements and balance sheet. Besides evaluating the financial results, look out for large changes in any line items (e.g. huge spike in debt) and the reason behind them
- Executive/director compensation which shows how much directors and key management are remunerated
Besides reading the annual report, it’s useful to also monitor the news and quarterly results to keep abreast of any new developments. So if you haven’t already done so, make a resolution to read the latest annual report of each stock in your portfolio and continue to do so every year.
4. Attend AGMs
Along with the annual report, the company’s annual general meeting (AGM) is another great source of information – straight from the horse’s mouth. AGMs give you the opportunity to meet the company’s directors and key executives face-to-face and pose them any questions you may have. Based on how they answer your questions (or not), this gives you an insight into how open and transparent the board and management are — especially when faced with hard questions. Questions from your fellow shareholders can also give you new, unexpected insights that you never considered before.
Another thing I like about personally attending AGMs is that the CEO normally highlights key developments and gives a detailed presentation of the company’s past year’s performance during the meeting. This makes reading the annual report after much easier and quicker as the AGM has already provided me with a good amount of context.
We’ve attended numerous AGMs in Singapore, Malaysia, and Hong Kong over the years and you can read our summary of all the meetings here. However, nothing beats the real thing and attending the AGM for yourself. So if you can, commit to attending the AGMs of at least the three largest holdings in your portfolio this year. You may have to take leave from work, but it’s a great excuse to get out of the office and learn more about your investments at the same time.
5. Read new books about investing
Investing is a skill which you never really stop learning. While the principles of value investing (e.g. stay within your circle of competence, or focus on the long term) can stand the test of time, business landscapes are constantly changing and we, as investors, have to adapt to the rules of the new economy as it evolves.
For example, the largest companies in the 20th century were from the oil, steel, utilities, telecommunications, and auto industries. Today, that list is dominated by technology; companies like Apple, Microsoft, Alphabet, Amazon, and Facebook have reshaped the ways of doing business in the 21st century. In fact, these five companies are the largest in the U.S. by market cap right now:
|Rank||Company||Market Cap (as at 17 Jan 2020)|
|10||Johnson & Johnson||$392.6B|
Source: Dogs of the Dow
Even Warren Buffett who is arguably the greatest investor of all time — and in his late eighties – is still an active learner.
“Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.” – Warren Buffett
Buffett was famous for avoiding tech stocks for the longest time. But if you look at Berkshire’s stock portfolio today, its largest holding is Apple Inc. Berkshire also owns stakes in Amazon and Verisign, a global domain name provider.
While reading 500 pages a day might be a stretch for many of us who are not full-time investors, we should still aim to increase our investment knowledge on a regular basis. To start off, you can commit to reading at least three new books on investing this year. If you’d like some book recommendations, you can check out our top five books on investing for beginners and our book reviews here, here, and here.
The fifth perspective
To conclude, resolutions work best when you set clear, definable targets for you to achieve. So just to recap, here are the five resolutions and their objectives:
- Save $11 a day (or more)
- Pick an investment framework – and stick to it
- Read the latest annual report of each stock in your portfolio
- Attend the AGMs of your three largest stock holdings
- Read at least three new books on investing
I hope these resolutions can serve as personal motivation and provide some direction if you’re looking for ideas to further improve as an investor. All the best and happy new year! 😊