During the recently concluded Shares Investment Conference (SIC) 1H2017, renowned investment expert and author Dr Chan Yan Chong talked about how to reach investment paradise.
What is investment paradise then? Perhaps we can understand it as financial freedom, and in the words of Dr Chan, it is “not having to slave away for a fixed/scanty pay”.
He added: “If your passive income from stocks, dividends, rentals, etc. exceeds your salary, you are wealthy and financially free.”
The “paradise” that he talked about is an acronym for the essential steps that one needs to take:
Any investment planning would have to start from saving, which tends to be difficult at the start but pays off later, said Dr Chan.
However, whether your goal is long-term or short-term will impact your risk-taking decisions.
If you are still far from attaining your financial goals, Dr Chan would advise you to take on more risks, spot opportunities, and seize them bravely. Conversely, being close to your goals means that you can (and probably should) make smaller bets and put less pressure on yourself.
Typically, there are two kinds of investing approaches—fundamental analysis and technical analysis. Dr Chan thinks that investors should adopt both approaches, at least at a basic level.
When it comes to fundamental analysis, investors should be aware that stocks usually move ahead of the economy, and stock market cycles are different from business cycles, as share prices represent the company’s current value plus its future returns, said Dr Chan.
“Also, for fundamental analysis, I do not read through thick financial reports. I think those are written for others’ perusal,” said Dr Chan. “I believe that it’s sufficient looking at these four key pointers—capitalization, debt, cash flow, and price to earnings (P/E).”
On the other hand, for technical analysis, Dr Chan follows the Dow Theory.
Investors should not only understand the reputation of the companies that they are investing in, but they should also try to uphold a good reputation themselves, said Dr Chan.
Much emphasis is placed on company reputation, especially when it comes to value investing. Typically, investors would have to read through thick financial reports to find that out, but Dr Chan suggested a few key areas that one can quickly look into Long-term P/E ratio, company’s performance in the previous market cycle(s), and its management.
Meanwhile, we as investors should uphold a decent reputation by paying off debt and mortgage, Dr Chan said.
“Trying to predict how a stock will trade in the short term is no better than a coin flip.”
The above quote came from Wall Street Journal columnist Steven Russolillo. If you are an attentive reader of Dr Chan’s articles, you will notice that he makes predictions as well, but they are not wild guesses based on pure emotions.
As a trained mathematician, Dr Chan invented the “Chan’s channel”, a method that uses linear regression to maximise the accuracy of identifying the top of a bull market and the bottom of a bear market.
The dividend payout is a major factor to consider, and especially so if you intend to invest long-term, said Dr Chan. We know that Warren Buffett has said: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
In that case, if we were to hold a stock for ten years, we’d better make sure that it pays us decent dividends. The idea of dividends might not sound thrilling, but investing in stable, dividend-paying companies can pay off massively in the long run and reduce overall portfolio volatility.
When it comes to dividend stocks in Singapore, Dr Chan suggested that investors can look into REITs.
Dr Chan is well aware that major world events can affect the markets. Investors might not be able to guess the outcomes of such events correctly. The least one can do, though, is to keep up with political, social and economic changes as well as understand the implications. In fact, he had previously written an article in which he pointed out that international affairs are keys to stock market trends.
With regards to speculation, Dr Chan said that he was “not against doing so”. He had also written in his book 机不可失 (translation: Opportunity not to be Lost) that majority of the mainland Chinese investors are just speculators who tend to speculate on junk stocks, though many would lose money while doing so.
Speaking of junk stocks, Dr Chan suggested that one could cast his net wide and buy an assortment of junk stocks to increase the chances that others would “bite the bait” and help to push up the stocks’ prices.
What Dr Chan meant by emotional quotient is one’s ability to regulate his/her emotions, handle losses with a positive mindset, as well as not act impulsively due to feelings of greed and fear.