Investing may seem simple in theory, yet it is never easy in practice.
One of my biggest bug-bears is that I feel unwilling to buy more of a stock that I already own if its share price has shot up.
This instinctive aversion kicks in even though, in my heart, I know that the company runs a solid business and its share price is likely to keep rising.
The miser in me wants to wait for a share price correction. But when this happens, the price is still much higher than what I had been willing to pay for the stock in the first place - so I lose interest in trying to play catch up.
So, while I own stocks in good companies such as ComfortDelGro, OCBC Bank and HSBC Holdings, I regret to say that I have failed to make follow-up purchases because their share prices have risen - in some cases by a considerable margin - over the years.
Even the best investors have to come to terms with this problem. But the big difference between them and the rest of us is their ability to overcome their aversion by ploughing more money into their successful stock picks.
Let me offer an example: In his book about long-term winners, One Up On Wall Street, fund manager Peter Lynch recalled that he bought into the Japanese carmaker Subaru after its share price had gone up twenty-fold. He gritted his teeth and bought anyway, and watched the car-maker's shares rise another seven-fold.
Maybe it's this knack for brave investment decisions that fly in the face of conventional wisdom that has enabled Mr Lynch to transform the then obscure Magellan Fund with US$18 million in assets into a US$14 billion (S$17.5 billion) behemoth over a period of 13 years.
So why is it, I wonder, that risk-averse investors like me so stubbornly refuse to put more cash into buying a good stock that has already proved its worth.
One reason could be that we are wired this way: Most of us find it very painful emotionally to cut losses on a bad investment, preferring to adopt a "wait-and-see" attitude in the hope that the bad investment can make a comeback so that we can sell out without a loss.
Likewise, the reluctance to chase a stock winner may stem from an irrational fear of losses if its price tumbles after we buy more at a price much higher than our initial investment cost.
This is because the pain we experience when we make a loss on our investments will always be much greater than the satisfaction we draw from notching up any profit that we may make on them.
How then do we grapple with this? I must confess that I am still trying to escape this trap even though I identified the shortcoming in myself long ago.
The first step to take is to identify the best companies which you would like to invest in.
Even if they only enjoy a growth rate that is slightly higher, on average, than the rest of the market, this should result in a hugely improved outcome after many years, thanks to the magic of compounding.
But in order to stay the course and add to our investments over the years, we must keep up the rigorous discipline of ignoring the "noises" sent out by a stock's short-term trading pattern and the overall market trend.
Part of the problem comes from the myopic focus of research reports put out by stock analysts as they chase a company's next earnings numbers.
Sure, such information is useful but what determines a company's long-term fair value is the dynamic of its earnings growth, and not the size of its short-term profits.
And having identified the stocks you want to buy and keep for the long term, you should adopt a "dollar-averaging" approach. That is easier said than done for most of us - including me. It takes a lot of discipline.
If you believe in the long-term fundamentals of the Singapore stock market, you can enrol yourself in a regular savings plan offered by some of our local lenders which will buy the stocks every month on your behalf.
POSB offers a plan which allows its account holders to put a minimum of $100 a month into the Nikko AM Singapore STI ETF, a low-cost index fund which tracks the Straits Times Index.
Similarly, OCBC Bank has a scheme which allows investors to invest as little as $100 a month on 19 out of the 30 STI component stocks, and the Nikko AM Singapore STI ETF.
Sure, in the short term, you may find that getting any returns on any stock investment in such a regular savings plan may be excruciatingly slow, but stick to your stock winners over the long term, and you may find yourself reaping a bountiful harvest.
It will also get rid of any hang-ups you may have about investing in a good stock whose price has gone up. One note of caution is needed though - you do have to check from time to time that your rationale for investing in the stock stays valid.
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