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Sunday, May 27, 2018

Five things I wish I knew when I was young

Lim Say Boon
MAY 27, 2018, 5:00 AM SGT

A hot tip can be stale news by the time it reaches you, says banking and financial media veteran while sharing the insights gained over the years

If I had known when I was young what I know now - after 36 years in banking and the financial media - I would have been very significantly wealthier. As they say, hindsight is "20-20 vision". Well, let me share five "20-20" insights.


There's a line in a recent Andy Lau/Donnie Yen movie that goes: "Riches or poverty, it's all destined." Fatalism is poison to wealth.

Building wealth is more akin to Renaissance-era philosopher Niccolo Machiavelli's ideas of "fortune" and "virtue". Good fortune without virtue/human endeavour is opportunity wasted. So, a lot of becoming wealthy is about human endeavour, effort, and a winning mindset. Here are some of the attributes of that mindset to start you off.


Be suspicious of anybody who tells you making money is easy. The paradox is, the sooner one accepts that making money is difficult and requires effort, the easier making money becomes.

Much money and even more time are lost by investors waiting, hoping for that "big one" that will bring them overnight riches. The truly long-term average annual returns on stocks is around 10 per cent. That's history, that's reality. Most "get-rich-quick schemes" are either naive, fraudulent or illegal.

I think back to the Sept 11, 2001 terrorist attacks in the United States. Markets shut. And when they reopened, there was panic selling, and very few buyers. Like many others, I bailed out at significant losses. If I had simply held on, every one of the stocks I sold at losses would be worth a lot more today.

What about "hot stock tips"? The market is so efficient in pricing legitimate news - and it often happens within hours, if not minutes - it is likely that a "hot tip" is already stale news by the time it gets to you. Or worse, it's the concoction of rumour mongers with stocks to unload on the gullible.


Time is money, as the saying goes. Even more so when the time lost relates to planning your finances. Many people put off the more uncomfortable but necessary tasks, focusing first on the easier or more pleasant jobs, often at considerable cost to themselves.

When I started working in 1981, I hardly thought of investing. My priorities were cars, girlfriends and parties - in that order. Well, it was difficult to get a girlfriend and get to parties if I didn't have a car. So, I was a gold medal-winning procrastinator when it came to managing my own money.

But if I had invested just US$1,000 in the S&P500 at the start of 1981 and left it alone, re-investing dividends, that US$1,000 would have grown to US$54,000 (S$72,300) by the start of this year. Now that's annual returns of around 11 per cent a year. That might not immediately make you go "wow" but cumulatively, that would have worked out to over 5,300 per cent returns today.

Now, if I had continued to invest - increasing my investments by 10 per cent every year - I would have ended up with an equities holding of more than US$1.3 million today. Not bad for investments totalling US$330,000.


When I eventually got around to investing, I was a speculator. And it didn't help that I worked for many years in the trading environment of stockbroking companies. I traded in and out of stocks, chasing the thrill of the "win".

But I would have done better had I followed the advice of an elderly and successful client from decades ago who told me his formula was simply: "Buy good, buy cheap, don't sell." Time is money. But an even more profound twist is "money is time".

You see, the long-term history of stocks is about mean reversion on rising trend lines. That is, stock markets go through cycles - up and down. But in sound economies, stock prices generally go up and down against a rising trend line.

For example, international investment firm Morningstar's estimate of one-year returns for US stocks in the period 1926 to 2017 puts the periods of gains at 74 per cent versus 26 per cent for periods of losses.

But as the period of returns lengthens, the odds of making money rises dramatically. For five-year annualised returns, the periods of losses reduce to only 14 per cent. By the time Morningstar got to 15-year annualised returns, the periods of gains were 100 per cent. No periods of losses.


At many periods in my life, I held far more cash than was necessary for emergency purposes. Often it was just haphazard planning. My excuse was always: "I'm too busy to deal with this now." And sometimes it was risk aversion.

But here are the historical facts about holding cash over long periods of time. Yes, over the very short term, cash is "safe" - in the sense that a dollar in a bank today will still be a dollar next week.

But be wary of the illusion of money. US$1 million from 1926, held literally in cash - the metaphorical "money under the mattress" - will today have lost 93 per cent of its spending power.

Put simply, the US$1 million will be able to buy only around 7 per cent of what it would have been able to buy 92 years ago. So, similarly, the savings you have now will almost certainly be worth a lot less in real spending power in 20 years.

You know how your parents say: "A hundred dollars was a lot of money when we were young"? Now you know why.

•The writer, a former chief investment officer at DBS Bank, is an investment professional in banking and finance, and the financial media.

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