No matter what you say about them, you still have to admit, compared to the rest of us, they have achieved much consistent returns than we ever could.
Thought I'll point out some ideas they put out that would be applicable to small investors like us.
On Growing rich:
Dr Goh Keng Swee, former deputy chairman of GIC, once said: "There is no real secret about the way in which most nations and individuals grow rich. They must save a good part of their income, and be wisely and profitably invested. The more you save and the more wisely you invest, the faster you get rich."
It rings true and is direct to the point. I would call the path to wealth via investing is a system, not luck via lottery.
To invest one must be able to control their income flows, and try to save as much money feasibly. If you do not manage your expenditure, no amount of money in the world can stop you from being broke.
Also, after which you have capital to invest (with a separate emeergency reserve, not combining other short term and mid term goals together, withdrawing your investments prematurely would result in losses or not much gain), learn about investing via books and internet resources, understand what you are doing. Then would you invest more profitably.
Everyone says money is important and you should not waste it, but how many people actually got down to learn what to do with it? It is important is it not? Don't throw money into the drain. Steer clear of investments you do not understand how it works. A good investment in the hands of a fool is still doomed to be lost.
Piece them together, you realise that, the more money you save (you have more money to invest), paired with investing wisely (knowing how and why), the better you can push the odds of you getting wealthy earlier.
On Long term perspective:
Investment return of GIC gained from:
- Compounding of returns (the power of compounding interest)
- patient harvesting of long-term risk premiums (slow and steady, rational, patient)
- countercyclical rebalancing portfolio (balance portfolio to manage risk and stabilise returns)
- ability to take advantage of short-term dislocations in financial markets (buying during a correction/pullback of stock prices to get best value and increase upside)
- longstanding relationships with investees, external fund managers and other partners (know how the companies of your stocks are faring, manage expectations).
On Time horizon:
It is also pointed out that you have to endure short-term uncertainty and occasional short-term pain, for it to pay off. No point in panicky selling during a correction, only for it to return back to the trend with you incurring losses and out of the market (but that's not suggesting that the company is going boom and you hold on to a losing share).
On mindset and discipline:
Time horizon is good but it is not the most important. Instead the mindset and discipline to consistently invest based on fundamentals and valuations.
Investing and/or trading, it is to be reminded that the psychology (mindset) and discipline to get consistency is extremely important. What we are looking for is consistency and predictability (for traders, say your trades have a 70% hit rate, unless there's a DAMN good reason why you discriminate a particular trade, i.e. additional filters or market conditions, you have to take ALL trades when you get the signal and sit on your hands while waiting for the signal, else the 70% probability will not work because you are not CONSISTENT).
Lastly, when you are looking for long-term positions, Technical Analysis can help you to edge a little in getting the best price for that range of executions but Fundamental Analysis will matter more, as you are buying a business not a stock anymore.
Having a system and being disciplined to it helps you tide over market fluctuations and uncertainty.
On GIC's Investment Policy:
Value discipline. Looking for compounding of fundamental value (FA) and opportunities in price-value divergence (TA). These require you to be patient, wait for opportunities and act on them when it appears.
Be mindful that long-term investing doesn't mean to buy and hold for long periods. The holding period depends more on price and value than time.
While prefer market prices to move up and meet valuations, be prepared to wait longer for convergence than most investors. (Lower trades with higher percentage success rates, stringent)
Translating this philosophy into practice requires constant, concerted effort. There's a difference between knowing about the idea and actually executing it. Make sure you put in constant efforts to maintain and strong concept instead of switching methods just because you tried a strategy for a month or two and it didn't work out. It takes TIME and EFFORT. Or even worse, dropping that plan you made for years with clear direction for a random sudden so-called "get rich quick scheme" where you never really analyzed nor planned, only to lose it, wasting your time and efforts thus far.
GIC's investing principles:
- Pursue instrinsic value and maintain price discipline (self-explanatory)
- Practise long-term investing (look into the time horizon, instead of short-term, lesser information to distract you)
- Pick our spots: Be focused and leverage our strengths (go into something you know and understand well, than something speculative and fuzzy)
- Pay attention to risk control (Risk management!!!!!)
- Prepare for the future (look far, prepare reserves and contingency plans, you are investing for the long haul, not a few minutes of excitement)
Look beyond marked-to-market prices and look at fundamentals, actual business performance, if done well, this will give an edge over many undisciplined investors.
Another point, which I strongly believe in, is that one should force yourself to stand apart from the crowd or the herd mentality and make a rational decision. Going with the crowd at times, subject you to many opinions which are affected by emotions, these are worse during major corrections where many investors get their hands burnt.
The article goes to point out that "largest investment losses tend to arise from procyclical decisions" and "Marked to peers can be a powerful and damaging psychological driver of such flawed decision-making".
On Governance framework:
Not much to say here, except that it reminds us to check and balance on your portfolios. Keep surprises to a minimum (predictability and consistency are favored over exciting and highly fluctuating things).
At the same time, always watch your investment closely. And if you got time, you can read up on new things to understand how stuff works. It will help you better your analysis on instruments that you wish to venture in.
On Investment mandate:
Everyone should have an investment plan for different time horizons (short, mid and long term), keeps you looking and driving the motivation on.
Keep a realistic goal with some leeway, so not to overstress nor over estimate your returns.
What we investors strive is to at least beat inflation (capital preservation) and work towards achieving returns comparable to the major indexes, or better still beat it (capital accumulation).
"Each portfolio and strategy, at every level, has a clear set of objectives, including a return objective, risk capacity, and scope of authority".
Well, we can ignore the last bit, but just to point out, using me as an example, I have separated my investing portfolio into 3 categories, Growth, Cashflow and Protection (which is CPF), notice my reserves are not included here.
These 3 have different objectives, Growth to provide capital appreciation, Cashflow to use dividend stocks to provide another stream of income, and Protection where I regard CPF as a bond to provide capital preservation.
These 3 carries their own return objectives, Growth to beat S&P500 index performance y/y, Cashflow to provide alternative income source to expand means (looking at about 5% return), and Protection using the CPF returns to protect against market downturns as the interest is constant.
The risk capacities are judged on their volatility. Growth naturally has a higher risk tolerance, followed by Cashflow (Dividend stocks) moderate to low risk. Protection (CPF) is expected to have low to near zero risk.
GIC measures the performance every 5 years, but I would recommend a yearly measurement with at least quarterly reviews.
Work hard to prepare expectations for your portfolio and it's subgroups, so that you can reduce/avoid surprises in the long-term.
On Organisation Practices:
Nothing to say here I guess.
On Communication:
My take home is that folks should plan out your investment strategies as closely as possible and maintain confidence in it, especially during downturns.
Don't brag about your large windfalls due to the fates.
Look towards sustainability rather than beating quarterly performances (worrying and stress damages the psychology and might lead to emotions clouding judgment and making terrible mistakes).
The article finishes off with a few key reminders.
Benjamin Graham's reference: "The market in the short term is a voting machine, but a weighing machine in the long term" (I can't remember the exact words, sorry). Suggesting that emotions may push the prices up and down but in the long run, fundamentals stand.
A very important point: "Long-termism and value orientation are at the heart of all we do (or any investment strategy for that matter), but to put these principles into practice requires constant vigilance and discipline"
And lastly, success in investing is a ecosystem sharing the same orientation, which I feel for us, means that it is a SYSTEM of components of various aspect of the investor, be it psychology, strategy, risk management, for it to work. By doing it well, the rewards will be there.
Well that's all for this lengthly post. Sorry about that. Hope it helps people to see and reflect on the ideas on investing.
(There's a part on a compilation of Perspectives On the Long Term is available at the website of Focusing Capital on the Long Term initiative at http://www.fclt.org/en/ourthinking/perspectives.html . Might be worth a look.)
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