I have been investing in the stock market for a fairly long time. Along the way, I have spoken to other investors, attended seminars, read books, watched videos and attended paid courses. The last 3 years have been the time when I really tried to put together an investment system having attended a few courses on value investing, options trading and read tonnes of books on investments.
I will append a number of articles I have written on the subject of investing in the stock market at the end of this post.
Today, I want to share my experiences and at the end of all that, my current investment methodology and philosophy if you will. It has worked well for me for the last 2 years and I have polished it up such that an annual return of 18% or more is possible, without taking on too much risks.
I do believe each person’s investment temperament is different, but I do sincerely hope my sharing here may benefit you as well in your investment journey.
In investment, time is money. This is of course due to the compounding interest effect on your returns and capital over time. The investor is always pursuing higher investment return at a particular risk level, otherwise he or she should buy a particular market index fund and just chill and relax. After all, how many people can consistently beat the index?
I have titled my post as both investment and trading. I like to view myself as a value investor but value investing is tough, which is why I also do short-term trading now.
I explain my philosophy in the following sections, Value Investing, Trading With Options and Portfolio Sizing.
Warren Buffett is most well known for being a very successful and wealthy value investor. But even for him, he has mentioned that when he passes on, he will have his estate invested into market index funds.
I have learned most of what I can about value investing. You can analyze all the financial ratios, the business and industry trends, the economic moat of the company, the management team etc etc.
I also analyzed Apple when it was trading at just about $90 and felt good that it was undervalued. If only I had a crystal ball to show me that it is now priced at $178, then I wouldn’t be swayed by all the negative analyst reports on Apple during that time!
Suffice to say that all the analysis (regardless of which value investing course you take) is still necessary but I think at most it is a filtering process.
A filtering process to tell you the list of companies which you can investigate further. Whether you want to invest with your hard-earned money and whether they are undervalued, which means are they the right companies and are they at the right price for you to go ahead and buy.
I have witnessed how some people believe they can understand every single company, every single industry by just analyzing the numbers. I absolutely don’t believe you can be such a genius. You would have to have lots of industry experiences, close to the technology innovators, the business honchos and read as much as Warren Buffett or more than him.
Therefore, in this area, my simple philosophy is that if you are adopting value investing principles as your investment methodology, then just stick to the few industries that are absolutely within your circle of competence (COC) and invest in perhaps not more than 10 stocks in these industries.
You should have an edge over other investors to come to a sound investment hypothesis about particular companies.
Trading (And Investing) With Options
Value investing is usually longer term and one necessary virtue is patience.
I am not the most patient person and I also like to have some monthly cash-flow from my investment. This can be from dividend payouts.
Another way is selling put options. I will not go into the details again but do refer to my appended articles if you do have the necessary interest in this area.
I will say here however that I have first experimented with the L.R.O.S. options strategy I learned to see if it works and subsequently fully convinced myself after nearly 2-year of consistent returns by selling put options on fundamentally sound companies. The difference between this and value investing is that I may not care whether the stock is currently undervalued, I am just looking at the technical charts and finding support levels.
Having said so, I have also now modified the L.R.O.S. strategy a little such that I have added on a few other rules and that I protect the downside with a buy put strategy.
My experience is that on the average, 1 to 2% monthly returns on your capital set aside for this is possible. In this instance, because the exact valuation of the stocks is not that stringent, you do not absolutely need to stick to stocks within your COC but should not stray too far away as well.
I will add that for the US market, instead of buying shares outright, consider buying leap call options to your benefit. Effectively, you still apply fundamental analysis and value investing principles and invest for the long term by buying call options.
Investment is also about managing risks. You will make mistakes but what we are doing is to minimize the mistakes we make. So spread out your investment and trades, example not more than 5% or 10% of your entire portfolio on a particular trade or stock.
Cash is important too, especially at this stage whereby the US stock market is not necessarily cheap and the market has had nearly 9 years of great bull run. The performance of the US stock market will impact the rest of the world, so it is important to pay attention to this market.
For me, I am still staying in the market but I have shifted almost 60% of my portfolio into cash. This percentage will of course have to change depending on the PE of the market currently.
I do feel that because we each have a different investment personality, we have to develop an investment philosophy that suits us. We must be able to sleep well at night with our investment decisions.
I have my wife invest a fixed amount into STI index every month because she does not necessarily like to invest the way I do. I know that’s a fairly safe way and still makes her money work harder. I will have her invest into S&P 500 index when it becomes cheaper.
Please leave me comments below and we can have some interesting discussions.
List of articles on value investment and options: