While on my plane ride to Berlin for a trip to watch my favourite orchestra at the Berliner Philharmonie, a powerful idea struck me: I could create an education fund to teach complete beginners the whole process of investing in equities, from creating an investment framework to the final selling of a stock.
The whole idea begin with a frustration that I’ve been brooding over: why are student investment clubs generally so lame? The raison detre for investment clubs, whether was it in Ngee Ann Polytechnic or Yale-NUS College, is supposed to be investing (literally), but the de facto mission is more like being a recruitment centre for banks and other financial institutions. The problem is, of course, that there are no funds available for students to do some kind of investing, and the best that investment clubs could do is to offer short courses on financial account and the likes—barely anything substantial.
But there is also a further problem from there: while people may know something about financial accounting and perhaps some theories about the financial market, that has very little to do with the activity of investing. Many people think investing in equities as a kind of mathematical problem—an intellectual puzzle, so to speak—where you just need to sit down, work through some thoughts, and magically have money rain down upon you. The assumption is that your smarts is correlated to the amount of money you will earn. This assumption is not even close to the truth. Investing is more of an emotional activity than an intellectual one: one does not need to be particularly smart to understand how the financial market works and to know the indicators of good businesses. Warren Buffet, the world’s most boring rich man, always emphasises on the role of emotional mastery in investment: “If you cannot control your emotions, you cannot control your money.” The correct investment pedagogy hence is one that involves the doing as much as the thinking.
Inspired by these thoughts on the plane, I wrote to members of Yale-NUS Investment Group to invite them to join this initiative that I’ll be helming, and the project commenced in the summer of my freshman year of college.
The plan is this: I would have 5 members (myself included) pool in a small sum of money. This pooling of cash is important for a few reasons: (1) economies of scale to reduce brokerage costs, (2) that people feel the pain when buying/selling a stock with real money, providing an emotional dimension to the education, and (3) it makes things serious. Each of the members have a specific role to play, depending on their familiarity with the work. For example, one member who was completed new is assigned to be the person in-charge of the CDP and accounting aspect of the work, while a more veteran member is tasked with playing the devil’s advocate—to try to wreck an argument as much as possible to see if there are any flaws in our reasoning.
I guide them through the whole process of:
- opening up a CDP and brokerage account
- determining the investment philosophy
- creating an investment-decision matrix
- filtering stocks worthy of attention
- analysing and pitching for a stock (or two)
- formulating a buy-plan and a sell-plan
- accounting for transactions and yield
The goal is that by the end of the project the members could and would invest in the stock market by themselves. They would know where to look for information, be critical about information in a financial report, and form good judgements to make sound investment decisions.
Determining the Investment Philosophy
Before meeting to create an investment framework, I made the members of the team to read on the various kinds of investment philosophies out there. I chose the “canons” in the investment world:
- Random Walk Down Wall Street — Burton Malkiel
- Common stock, uncommon profit — Philip Fisher
- Five Rules — Pat Dorsey
- One up on wall street — Peter Lynch
- The intelligent investor — Benjamin Graham
- If you’re clueless about the stock market; chapter 8: Investment strategies using derivatives and other stuff) — Seth Godin
- Security Analysis — Benjamin Graham (skip all the introductions to the editions)
Each of the readings represent a different philosophy, and we were to use our liberal artsy fartsy skills to determine which one we like best. I really like the following words from Peter Lynch in his One Up on Wall Street.
To help speed up the process of creating a framework (from scratch, ouch!), I provided them with a skeleton framework consisting of both qualitative and quantitative considerations that we would build on progressively as time goes by. The basic framework (not much changed in the end) is embedded below:
All of us were tasked to analyse a bunch of companies, and then make a pitch for one or more of them. The companies were filtered through a pre-determined metric in a stock database, and then analysed one-by-one, reading the annual reports and “scuttlebutting” for information elsewhere. It is actually not so much a pitch (I find stock pitch competitions to be incredibly retarded), but more of a highlighting that a stock is interesting and should be looked into. We then go through a process to see if anything is worth buying at all. The principle is this: if nothing is good, don’t buy. Here’s an simple example of how we raise talking points about a stock:
We eventually settled on a portfolio by July 2016, and cashed out all our positions during June 2017. We yielded a total of 14.1% for the accounting year, beating the market many times over over the same period. As it’s just a period of 1 year, I would attribute part of the success to luck, though it’s safe to say a huge part of it also comes from our prudence with our fundamental analysis on our stocks.
While I had plans to continue this investment fund which I found to be really, really fun and meaningful, I eventually dropped it to concentrate on a greater love of my life: astronomy research. I do, however, still love to talk about investments (as my good friends Heng Xuan and Gary would attest)—if you have any questions, feel free to contact me.