How We Beat Wall Street and You Can, Too!
I previously attended an online interview sharing session between Resh & Eugene Ng. It is from that very session that I get to know about this book – Vision Investing. (Many thanks to Brendan for the book)
The year of 2020, was a wild wild ride for most investors and traders.
Many ‘gurus’ started appearing in social media to educate people about how to earn money when the pandemic hits strong. Some advocates the use of high leverage, which leads to incredibly over 100%, 200% or even 10X portfolio return within a year.
For example: stocks can be leverage up to 20X in trading platform such as eTORO. Option, on the other hand, is a type of derivative instrument that gives leveraged returns, which helped many traders reap huge profits last year alone.
While the use of leverage increase the potential gains from your positions, it is really a double edge sword. The probability of you losing more money in that particular trade is now also larger.
With 10X leverage, for each 1% increase in stock price, you gain 10%, but every 1% drop in stock price will result in -10% return too.
Options too, even with limited risk, it is a time-decaying asset. When stock price movement goes against you, you are subjecting yourself to a higher probability of losing away your money, as time is working against you, eating up some of your options premium day by day.
So, I get the point. Leverage is not for everyone, especially not for beginners. How is that linked to this book here?
The author of this book, Eugene Ng, managed to outperformed the market and most investors with an annualised portfolio return of >200%, with ZERO leverages used. This, my friend, is really interesting.
While getting a 2X or 3X from certain top-performing SUPERSTOCKS are not to say impossible, Eugene achieving this result with a largely diversified portfolio (under Vision Capital), owning more than 80 stocks in his total baskets.
As most of us knows the math, the more you diversify, the lower portfolio risk, therefore lower potential gain.
This guy, defies the conventionally rule, suggesting even with diversification in place, extraordinary portfolio return is still possible.
So, how did he managed to still ?
Wondering how did he do it?
First and foremost, you need to have a gameplan.
And here lies the very core of Vision Investing.
I personally held the similar investing principles as to Eugene’s investing motto: Invest only in companies that will help to build the future that you envisioned.
This brings up a very large point on investing, which not everyone agrees with. Investing is NOT only about making money, but also showing support to an industry, a company, or a potential technology or future that you wanted it to success.
Many investors in the early days do not have this concept in mind, and they throw their money into the companies that can generate the most profits for them. This is one of the reason why oil industries have been dominating for such a long period of time, which green and renewable energies have been underperforming (one of the obvious reason is of course, not attractive enough for investors to support these companies or ideas, which paradoxically results in poor development and advance in this area).
In my case, for example, I do not invest in gambling companies, or tobacco companies, as I do not advocate such things to triumph in the future that I envisioned. I also have cut away my positions on FB as it conflicts with my own investing ethics.
On the other hand, I support cybersecurity as it will be significantly more and more important in the future, when we load more data and information into cloud storage etc. I would like to support also on autonomous driving. where we can solve the basic yet unsolvable traffic problems.
If the theme of that industry or a particular company, does not fit with your vision, or your core value, do not bother investing in them even if it generates high profit.
It is also equally important to have the discipline to stick with whatever game plan that you have laid out. Those with the lack of discipline to stick with the game plan, can never be able to execute and perform as according to plan.
In Vision Investing, Eugene called this “THE 16 COMMITMENTS”.
I call it the disciplinary actions or checklist to clear before you invest.
Adhering to the 16 commitments listed below, it is possible to beat the Wall Street. Refer to the list below:
THE 16 COMMITMENTS
- We will not time market or trade with respect to our long-term investments.
- We commit and know we can invest better and beat the market.
- When we invest, we invest only for the long-term. Our holding period is forever.
- We understand that stocks will always go down faster than they go up, but stocks will go up more than they go down over time. Market sell-offs present buying opportunities for us, not selling opportunities.
- We commit to find and invest in the best companies for the long-term.
- We commit to understanding that the massive gains from a few of our multi bagger winners, will more than offset the combined losses from our losers as they become negligible over time.
- We commit to have a diversified portfolio and own at least 15-25 stocks.
- We commit to reduce my borrowings where possible, be disciplined in our spending, save, and invest as much as we possibly can.
- We love companies with growing revenues and profits.
- We love companies that especially have operating leverage.
- We love companies that are financially strong and preferably have net cash.
- We love companies with growing revenues, profits, and cash flows.
- We especially love companies with negative CCC that get paid to do business.
- We commit to finding excellence, buying excellence, and adding to excellence over time. We sell mediocrity. That’s how we invest.
- We almost never invest in turnaround companies.
- We prefer to own businesses that are founder-led and owned that have a good track record of running the business.
Among all the commitments, one that strikes me the most is commitment 14 – FIND EXCELLENCE, BUY EXCELLENCE, ADD EXCELLENCE & SELL MEDIOCRITY.
The ability to review your portfolio, adjusting your allocation by adding more positions to your winners, and reducing your stakes on losers, will eventually prove to work well and extend your portfolio returns.
Again, we must also acknowledge that all men are flawed, one way or another. We will never be 100% correct all the time.
This is why diversification is still very important for every portfolio. Portfolio allocation, too, plays a crucial role on determining how your portfolio performs based on the amount of money you are investing in the companies.
While one super performing stocks can 10X its price, instead of subjecting yourself to tremendous amount of uncertainty and risk, with an allocation of 10% of your total portfolio to that particular company, you can already double your initial cost of capital too.
The book is also SUPER BEGINNER-FRIENDLY. It talks also about the different financial terms to lookout for while doing your due diligence before investing in a company.
I would recommend fresh investors to enjoy this light read book.