Are you investing CONSISTENTLY?
This is a simple concept that most investors today forget.
It may be true that the fast and the furious wins the car race, but in stock investing, it’s usually the slow and steady that wins. That is because of consistency.
Things That Need Consistency
Well one thing is compound interest. If we want to be successful in the long haul, one thing we need to be consistent of is the growth of our portfolio.
Seth Klarman pointed out in his book Margin Of Safety the importance of consistent compound interest. Would you want 16% returns each year for ten years in a row, or 9 years of 20% returns and a 15% loss in the final year?
This is a tough question but if someone would ask me this without doing some math, I would probably choose 9 years of 20% returns because at first glance, 15% loss in the final year would be so minimal since I gained 20% annually for the past 9 years?
If you’ll do the math, 10,000 pesos invested will be worth 43,858 pesos in ten years but if you do the first situation, it will be worth 44,114 pesos.
The point is this, to make our money grow, we should avoid disrupting the whole process of compounding the moment we start investing.
As investors, this should be one of our main concerns.
One major loss and it will be hard to recover all the money that is gained through compound interest.
For the companies we invest in, it is also important they are also consistent in reinvesting their earnings to further grow their business. When the company buys back its shares or invests in other ventures that would help the company grow, its intrinsic value will increase because the company’s earnings will compound.
Just look at Berkshire Hathaway. They never paid dividends because they reinvest their earnings to buy other businesses or buy back its shares.
If a company is consistently growing, it is easier to predict its earnings compared to the boom-bust companies that have volatile earnings. Warren Buffett says that we cannot predict the future. It is always uncertain but we can make educated guesses and make reasonable and accurate estimates if a company is growing consistently.
On the other hand, if the company is making it big today then gets a huge loss next year and then makes mediocre earnings on the third year, it will be hard to predict where the company is going.
If that’s the case, it will be hard to estimate its intrinsic value.
Consistency is the key. Manage your portfolio to keep the magic of compound interest consistent and invest in companies with consistent earnings and growth.
The Philippine Stock Exchange today goes through many ups, downs and sideways movement. Even the swing traders are having a hard time timing the market.
Final Thoughts
If you think that it’s hopeless and stressful to watch your portfolio go red everyday, then you should read this article by Seth Klarman way back in 2009 when the markets in the US took a huge plunge during the global financial crisis. This is a good article to remind us that amidst uncertainty in the market, we should take advantage of it to buy on bargains.
LINK: The Value Of Not Being Sure
Happy investing!