Earning passive income is the first step towards achieving financial freedom, when passive income received every month surpasses the average monthly expenses. How can an average person in Singapore earn passive income and build it to an amount higher than your expenses?
Well, let’s list a few ways:
- Investment income from dividends
- Coupon payments from bonds
- Rental income from investment properties
- Capital appreciation from stock investment
- Interests from bank deposits
- Online business income such as affiliate marketing income, e-commerce income
- Publishing a book and getting royalty from book sales
Stock investment offers a good path towards earning passive income through two mechanisms, regular dividend payments and capital appreciation with higher share prices.
Some people feel that it is very risky investing in the stock market. I have personally interacted with many of these people and their opinions are often formed either because they have lost money in the stock market before or they have observed their relatives and friends getting burned.
In reality, retail investors lose money in the stock market often because they do not know what they are doing. They make their investment decisions based on hearsay, getting stock tips purely from analyst reports, friends, stock brokers without doing any bit of homework. My hope is that they at least do other forms of investment that beat the inflation, otherwise their savings are just getting smaller and smaller over time.
The principles of successful stock investment as quoted from investment gurus Warren Buffett and Charlie Munger are simple and lasting:
Buy only wonderful companies:
- Buy companies whose businesses you understand
- Buy companies with durable competitive advantages, which can take on competition and grow their revenues and earnings over a long time
- Buy shares of these companies at a discount, with comfortable margin of safety
- Buy companies with good management team
Let me explain a little about each of the four points listed.
Buying Companies You Know
Stock analysis involves digging into how a company makes money, why its customers buy its products and services, how it competes with competitors in the same industry, how much profit margins it can maintain etc. This means you have to know the company’s business operations somewhat. It does not mean that you have to be an expert, but it is so much easier for your research and analysis if you already know the business to a certain extent instead of starting from scratch.
Buying Companies With Durable Competitive Advantages
When a company succeeds in providing products or services to its customers and there is money to be made there, you can be sure other competitors will soon join in the fun. Remember Apple was the first company to introduce the smartphone and it was then copied by so many other mobile phone manufacturers, Samsung, Sony, Huawei, Oppo etc. In order to continue striving in the market, one has to have some durable competitive advantage. In the case of Apple, it is the branding it has with its quality products and the strong ecosystem it has built up.
Buy Companies At A Discount
This step involves some kind of valuation to determine the worth of the company, how much you should be paying for the company. Mr Market often gives tremendous discount to the actual value of the company, and thus you can build in some margin of safety such that you are buying something that is worth say $10 for $5.
Buy Companies With Good Management
Lastly, you want to buy companies with a good and capable management team whose interests align with the shareholders. This ensures they don’t make management decisions that are short-term based aimed at enriching themselves.
Let’s have a video summary hearing directly from Warren Buffett and Charlie Bunger.
You see if you get these principles right, the intrinsic value of the wonderful company is going to grow over time, and this is important. When you try to determine the value of the company (called the valuation stage), this valuation may not be rocket science and sometimes you may get it slightly wrong.
However, if you are buying into a wonderful company and you are a long term investor, even if you get it slightly wrong (at a point circled red below) when the share price is slightly overvalued, in the long term you will still make money because the value and share price of the company have gone up above your purchase price.
Stock investment compared to property investment also offers a better investment return over the long run, at least in the context of the Singapore market. The capital required is also much smaller and you can choose to diversify across a number of stocks rather than owning just one single investment property that often requires a huge capital outlay.
Risks in stock investment come from not knowing what you are doing. For investors in the stock market, it is important to educate yourselves well.
Journeywithmoney is conducting two upcoming Stock Investment Coaching Classes and we will share more details so you can be better than 90% of the retail investors. We are giving 5 tickets worth $25 each FOC, so please Register below now with the promo code JWMfree. After the 5 free tickets, you can still get limited tickets at discount rates of $15 each with promo code JWM10.
At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.
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