Saturday, August 15, 2009

On the folly of investors advice.

Teh Hooi Ling in this mornings Business Times reiterates many of the common investment advice for novice investors (like myself). I guess, this morning my mind finally snapped and I just couldn't take the mindless thoughtless advice constantly repeated as if it is mantra from these professionals. Actually, I'm being a little unfair in singling out Teh Hooi Ling, who's column I often enjoy, but to distill it to it's base, investment advice commonly boils down to this simple set of vague pointers:

1. Compound interest is miraculous, at 8-10% you will be a millionaire in your 50's!
2. Research and think in detail about the stocks you buy,
3. Sell when things are too risky!

The first one really pisses me off, but I'll come back to that one, so I'll deal with objection 1 first: I think a lot of this sort of advice is really lacking in specifics - you know really practical specifics, e.g. buy a stock when the PE goes below 10, or buy the market after 3 straight days of losses. I can understand this totally - there are no specifics to give. Every rigid investment strategy known to man has at some time found wanting (value investing, dividend yield, technical, fundamental etc.), so there are no specifics to give. Then, you base your research on a companies last quarter of results (assuming it's available, and for the Singapore Exchange it often isn't). But that is in the past, and the exchange prices the share *on future earnings*. So, what, at the end of the day is research - it all comes down to a gut feeling on whether a share is good or not.

Objection 3 is easy to dismiss - risk is obvious in hindsight. I know a lot of people who got out of the market in 2005 as it appeared too risky. It was, for sure, but in the meantime it continued to run up until 2008, only then did it crash. Risk and value are easy in hindsight. Examples from the past are meaningless. Currently as I write this I think that risk has possibly never been higher in the world, due to a variety of factors, essentially between China and the US, but perhaps in another entry.

Objection 1 is the one that always gets me though. Not because it is untrue, it is true - 100,000 units of currency invested at 8-10 % will become 1,000,000 units in about 30 years. That's maths. My objection is - where can I find and purchase these investment vehicles that pay me 8-10 % per year with little to no risk? Or, perhaps even with a lot of risk? The local banks pay a shocking 0.125% interest, whilst their 'special' 'super' 'amazing' accounts pay a whopping 0.8%! Oh. my. god. Hold the front page! The Straits Time Index (an index of approx 70% of the turnover on the singapore exchange) pays a dividend yield of around 3.7% (as of 2009, it's probably going to be lower in the near future due to reduced profitability).

I suppose you could buy preference shares, DBS will give you 6% and UOB 5%, or you could get into some of the REITs, which do start to get near the magical 8-10% (Suntec Reit pays ~7%, although it's share price is rising). And finally you could buy some of the really wierd esoteric dividend yield vehicles - like the shipping trusts, some of which pay ~12%. But you would be a fool to put your trust in such horrifyingly volatile instruments, they pay 12% or more for a reason (er... because sometimes, they don't pay anything at all).

Then there is the old chestnut that the stock exchange grows at 10% on average per year. But these measurements always seem to choose good windows for measurement. Let's look at the STI from 1987 to today. In 1987 it was ~800. Today it hovers around 2600 after a pretty robust rebound (despite Singapore still being in a recession). That's a gain of 69%. Or, 3.13% per year (actually it's less than that due to compounding, which I can't be bothered to work out). So, adding in a generous dividend yield of 3.7% (it has not always been so high) and the generous growth of 3.13%, that still only makes 6.9%. Still a couple of percents short of the magical 8-10%. Actually there is a reason it's 6.9%, and it's terribly simple - when all is said and done, the exchange can go up and down (and it sure can go up and down a hell of a lot), but it must return to its trend line - GDP growth.

Well, that's probably enough for now. I haven't talked about bonds (appalling, even risky companies can get away with ~4% and a lot of the juicy stuff is not available to the retail investor - you need ~100,000 SGD to even get started), inflation linked treasuries (miserly, inflation +2-3%) hedge funds (not always available to the retail investor, and anyway fund of hedge funds only get the same as the market over the long term).

Rant over.