Albert Einstein
| I have written an article “Young people and the five important things in investing” in the link below: |
http://klse.i3investor.com/blogs/kcchongnz/91536.jsp
First up is the Magic of compounding, the eighth wonder of the world. Forget about the seven wonders of the world; Great Wall of China, Great Pyramid of Giza, Roman Colosseum, or Taj Mahal, they don’t come close to approaching the true eighth wonder of the world. Here are some reasons why.
In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.
And what about the legend of the inventor of chess? Apparently he was granted any wish by a grateful king, and asked to be rewarded with one grain of rice on the first square of the chessboard. The amount was then to be doubled on each successive square. The king agreed, thinking he would have to pay a few handfuls of rice. He was shocked to discover that by the 64th square — thanks to compounding — he would owe the inventor enough rice to carpet the entire planet!
When it comes to investing, most people think of making big short-term gain, in a few months, a few weeks, a few days, or within the same day. Forget about asking them to wait for three years. But can they beat the long-term compounder?
Let us look at an example of a hypothetical return comparison between a long-term steady return and a quick in and out of the market trying to time it and hope to make extra-ordinary returns.
Quick and Steady return
Figure 1 below shows the typical 10-year return of a “Quick” speculator and a “Steady” long-term investor, both starting with RM100000.
Quick aims for fast gain, getting in and out of the market, buys and sells based on what the charts tell him to, and always looking for “the next big thing”. It has a higher average return over the 10 years of 15% a year, higher than the average, and more steady return of the long-term investor, Steady, of 10%. Table 1 in the Appendix shows the hypothetical annual return of both the market players.
At the end of 10 years, Figure 1 shows that the RM100000 invested by Steady has accumulated to RM253000, 37% more than what Quick has accumulated in the amount of only RM106000. The compounded annual rate (CAR) of Steady is 9.7%, whereas Quick could only achieve a CAR of just 0.6%, although it has a much higher average return.
Who is better here; the rabbit of the turtle? A sprinter or a marathon runner in a 10km race?
Investing for the long term for compounding, does it work in real life?
In a paper titled “The Super Investors of Graham and Doddsville”, Warren Buffet showed the track records of each of nine disciples of Benjamin Graham showing that they all generated annual compounded returns of between 18% and 29% over track records lasting between 13 to 28 years, out-performing the broad market by wide margins. Let’s have a look at their profit history...
| Investor | No. of Yrs | Annualised Return | S&P / Dow Return |
| Buffett Partnership | 13 | 29.5% | 7.4 % (Dow) |
| Walter Schloss | 28 | 21.3% | 8.4% |
| Tweedy Browne | 16 | 20% | 7% |
| Bill Ruane | 14 | 18.2% | 10% |
| Charlie Munger | 14 | 19.8% | 5.0% (Dow) |
| Pacific Partners | 18 | 32.9% | 7.8% |
| Perlmeter Investments | 18 | 23% | 7.0 % (Dow) |
Take for example of the investing experience of Walter Schloss who had made a CAR of 21.3% over a 28 years investing period. RM1000 invested 28 years ago becomes RM223000, or a gain of 2220%! How can one who made 120% a year, lose 20% another year and so on so forth can beat one who makes 2220% in the long term?
Most recently more investors such as Joel Greenblatt, Seth Klarmen, Howard Marks, Mohnish Pabrai, Peter Lynch and many other fundamental value investing fund managers have all generated high return of over 20% CAR over an extended period of time.
http://klse.i3investor.com/blogs/kcchongnz/88007.jsp
What about long-term investing in Bursa? Can it compound? Why there are so many investors, some seemingly very experienced investors say it is not advisable to invest in individual stocks listed in Bursa for more than three years? Do they have statistical significant results to prove that?
I really don’t know about this too as there is no academic research carried out on this, unlike in the US market. What I can do is to do a simplistic back testing on some stocks listed in Bursa. I would use those stocks I have had in the two established portfolios of mine in i3investor about three years ago, and back test them for a longer period of 10 years, and see if holding them for 10 years can provide a good compounded return.
Ten year compounded return of some stocks in Bursa
Table 2 in the Appendix shows the returns of the individual stocks in the combined portfolio of mine of 19 stocks invested from 1st March 2006 to 29th February 2016. The period of study is reasonable representative as it has included a complete cycle of boom and bust.
Some of the stocks have shorter listing history and the actual shorter periods of listing are used. Some, for example Jobstreet, has no complete records and partial and shorter records were used. The share price data were obtained from the adjusted prices given by Yahoo Finance as shown in the link below.
http://finance.yahoo.com/q/hp?s=9598.KL&a=02&b=1&c=2006&d=01&e=29&f=2016&g=d
It is assumed that a total of RM100000 was invested in equal amount for each of the 19 stocks in the portfolio.
In this 10-year period, KLCI has increased by 80%, or a CAR of 6%, an underperformance compared to the historical long-term return of about CAR of 10%.
However, the portfolio of the 19 stocks has returned 470%, or a CAR of 24.4% over the 10-year period. RM100000 becomes RM572000. Seventeen out of the nineteen stocks made positive returns, ranging from a low of 49% for Plenitude to a high of 1843% for SKP Resources. Four of them are 10-baggers; SKP Resources (+1843%), Datasonic (+1675%), Pintaras Jaya (+1424%), and CBIP (+1005%). The CAR of these 10-baggers range from 27.2% to 34.5% for those stocks which have more than 10 years’ records.
What is the risk in investing in these stocks for the long-term?
There are only two losers; Pantech and Fibon, with only a minimal loss of only 22%, and one other under-performer in Plenitude, which only managed to garner a cumulative return of 49% for the last ten years, underperforming the broad market of 80%. The return of the portfolio will be dismay if the investment was focus on these few stocks. Hence, it pays to diversify as discussed in the fourth point in my last article.
So who say one cannot invest in Bursa stocks for more than 3 years for compounding return?
But is it true that you can invest in any share in Bursa and the good compounded return will come?
If you have invested in the 30 component stocks of Bursa, your return over the last 10 years is 80%, or a CAR of 6%. It is still not too bad if you invest by yourself with your own money. If you invest in a unit trust tracking the broad index, you will likely under-perform, and by a wide margin, if you take into consideration of the upfront fee and the high management expense. This certainly does not beat the return from your EPF.
You will be much worse if you are like a “normal” investors, listening to rumors and stock tips from others.
Table 3 in the Appendix shows that all stocks, except for Guan Chong Berhad, incurred losses over the 10 years’ period, with 6 of them over 52%. KNM and CSL have their value almost completely wiped out.
There are so many companies to invest in Bursa for compounding wealth. Avoid the lemons.
“Avoid the downside; let the upside takes care of itself” Mark Seller
What is the best course of action to compound your wealth in the long term after seeing in this results?
Conclusions
Let me bring you youngsters back to my previous post on “Young people and the five important things in investing” in the link below:
http://klse.i3investor.com/blogs/kcchongnz/91536.jsp
Investing through fundamental value investing by looking at the business as buying a stock is akin to investing in part of a business. You should invest in part of good businesses, and more importantly, buy their stocks when they are selling cheap. I have given all the reasons why fundamental value investing work, together with statistical significant evidences that it has worked in US and other major markets around the world, and it continues to work.
http://klse.i3investor.com/blogs/kcchongnz/50988.jsp
In order to achieve good compounded return from your investment, you should first invest in yourselves in investing knowledge.
“There ain’t no tooth fairy in Bursa”.
Do these knowledges of analysis and interpretation of financial statements, valuation and the psychology of investing really work in Bursa?
This is what I have just received from a course participant of my online course:
Kk Chong1 March 2016 at 10:17
Hi KC,
Warren Buffet says we need to remember 2 Rules in the Stock Market : 1)Never Lose Money 2) Never Forget Rule No. 1. I believe taking your course fulfills both Rules. Your course makes sure we follow these simple but difficult to follow Rules.
My objectives of learning from you is twofold: to learn how to understand financial statements in the company's Annual Report and how to evaluate stocks. I am happy to tell you that both objectives have been achieved much to my delight.
You encouraged me to put in some effort and I will be able to achieve my objectives. Effort I put in especially the exercises and the assignments. Reading the articles is easy but as Bruce Lee says knowing is not enough, we must APPLY; willing is not enough, we must DO.
My experience in DOING the exercises and assignments really forced me to put in effort in really understanding the concepts and calculations behind the financial figures and formulas. Then, I studied your comments and the sample answers to see where I went wrong in my answers. It is truly a Practical Learning Experience.
Your course is comprehensive whereby every topic is covered by inputs from videos, articles, references, e-books, discussions and assignments.
The topics most useful and relevant to me who like regular income through dividends are the Financial Statements, Coldeye's 5 Yardsticks and DDM. TVM on Retirement and Financial Planning is an added bonus.
Your fee, as you said, is only "teh tarik" money. Sure enough, it is. But you actually "belanja" us. Why so? Because along the way, I picked up Apollo (4.90), Padini (1.60), Perstima (5.10) and Scientex (7.80) as a matter of course (pun intended)! Talk of bonus. Your course is really buy one with 3 freebies. Talk of Value for Money. Your course is a shining example.
KC, what you are doing now, teaching others Fundamental Value Investing is most noble. I am sure you derive much satisfaction in helping others achieve their monetary goals by giving and sharing so much through this course and writing articles in i3investor.
For all these, I thank you from the bottom of my heart, Sifu KC.
Yes, I derive a lot of satisfaction in helping others achieve their monetary goals. For those who wish to build long-term wealth slowly, steadily and surely, please contact me for an online investment course for a small fee at
Ckc14training2@gmail.com
K C Chong
Appendix
Table 2: 10-year return of some stocks in Bursa
Table 3: 10-year Return of lemons
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