‘Studying hard’ not a sure-win to investment success

Education Minister Ong Ye Kung recently announced that mid-year examinations will be scrapped for certain primary and secondary school levels. Most of us remember how we used to think that our exam results could determine our future.

We studied hard, so that we could snag that place in one of the coveted schools, believing that this was the first step to achieving what was needed to ensure success in life.

Because of our ingrained "exam and study" culture, it is hardly surprising that many of us equate studying hard and doing well with most aspects of our life.

Thus, is it surprising that we also apply the same approach to investing?

We believe that if we know more about investing, and know when to trade and which stocks to trade, we can achieve investment success. In other words, the more we "study" and know, the smarter we become, the better we will do.

Or will we?

The sad truth is that working harder and being "busier" at investing does not necessarily lead you to investment success, which is independent of your IQ or work ethic.

Anyone can be successful in investing if they were to merely follow a few simple rules (see end of article).

The financial services industry is a magnet for many smart and capable people. All these brilliant individuals are hard at work every day trying to figure out what the best investment should be at any given time.

However, the fundamental flaw with this approach is that nobody can predict the future. The vast amounts of time, money and effort that are spent on research can be rendered redundant by unforeseen economic, corporate or political events. The best researched investment bet can go awry in an instant.

Using 2016 as a case in point, the consensus was that oil prices would stay high and investments in oil-related companies would be a good call. This thesis was perfectly logical — the world was getting richer and consuming more resources, which resulted in higher energy needs. How could the price of oil possibly collapse? As we all now know, it did, and it was a downturn that many didn't see coming.

So, what happened? How can such "educated" forecasts from respected investment professionals go wrong?

BUSINESS MODEL: GETTING YOU TO TRADE OFTEN

Part of the answer is how the financial industry works.

It is an open secret that the business model and compensation structure of the main players in the industry is to get you to trade, and trade often.

As such, these institutions have a vested interest in convincing you that the key to having a successful investment experience is by buying and selling your investments often, and preferably by subscribing to their market calls, which change frequently and almost on a daily basis.

Thus, the business model is simple: Each time you trade, you pay a fee (whether brokerage or otherwise) to the institutions for rendering you the service.

You may think that you have negotiated cheap fees, but if you trade often, these fees can add up to a lot, which ultimately subtract from your returns.

Institutions incentivise you further by giving you special client privileges if you trade often, such as direct access to the dealer desk, lower trading fees, or exclusive invitations to special events.

This is all fine if all that trading leads to good investment returns in the long run, and paying fees is a legitimate compensation for services rendered.

Yet, surprisingly, a buy-and-hold static portfolio works best for most investors.

So, why isn't this being promoted?

The simple reason is that a banker who sells such an investment approach may not be able to generate sufficient revenue to meet his key performance indicators (KPIs). Hence, the industry is not incentivised to change the way they sell or operate.

LESS IS MORE

It may also be a surprise to many that investment success has absolutely no correlation with the level of your IQ or qualifications. Smarter investors tend to do worse than average.

In contrast, people who succeed don't really trade much. Instead, they concentrate on getting their asset allocation and underlying portfolio properly diversified — which helps them stomach market volatility when it happens (which it will).

If you need more proof that assiduously keeping up with what happens in the markets won't help you outperform, one study humorously found out that the best performing investment accounts were from people who were either dead, or had forgotten that they had investments in the first place.

In other words, investment success was most likely for accounts that were untouched and left to work on their own.

The obsessive thought that one needs to be constantly trading or tinkering with one's portfolio in reaction to or in anticipation of market events, affects not only individual investors but professionals who manage money on behalf of others. However, the big difference is that these busy managers are able to pass on their costs of trading, research and other costs for supposed outperformance back to the end investor.

Investors must realise that investment returns are a zero-sum game.

The higher the fees you pay — be it through trading, research or other costs — the lower returns you receive.

So, don't join the pack in seeking to be smarter than everyone else by studying hard about individual stocks, and trying to uncover the next Facebook; it is extremely difficult and the odds are against you.

Instead, just remembering these simple guidelines will help you create a better investment experience:

1. Let the stock and bond markets work for you, instead of trying to out-guess the market.

2. Investing is not gambling. If it feels like gambling, you're doing it wrong.

3. Consider the factors that contribute to higher returns, and make them part of your portfolio.

4. Practise diversification (having a portfolio made up solely of Singapore stocks is not proper diversification) and don't keep actively trading around.

5. Manage your emotions. Don't let yourself be swayed by fear or greed into making impulsive decisions that you regret later. Get a good friend or trusted adviser to keep you grounded.

6. Take a long-term view and let compounding work for you.

7. Don't let scary headlines distract you. Focus on the big picture and what you have set out to do.

8. Focus on what you can control. You cannot control how the market will perform, but you can control how you react to it.

ABOUT THE AUTHOR:

Aw Choon Hui is the deputy chief executive officer of GYC Financial Advisory, a licensed financial adviser and registered fund management company.