Last Friday. I took half a day off work to visit the ‘Star Wars Identities’ exhibition held at the Artscience Museum in Marina Bay Sands, and at the same time, utilising part of my Singapore ReDiscovers voucher (for those of you who have yet to use their voucher, and is a Star Wars fanatic like me, there’s still time to visit the exhibition, as it runs till 13 June 2021. More details can be found here.)
Upon entrance into the exhibition, we were directed to watch a short introductory video. One of the sentences in the video stood out, and I was fast enough to snap a photo of it:
Now, you may be wondering – how does this sentence relate to investing?
Let me explain – because all of us are different (one way or the other), the way we invest is also different – some of us may be risk-averse, some of us may be risk takers, while the rest of us may be somewhere in between. As such, the way we invest too is also very different.
For the more risk-averse individuals, they may prefer to invest their hard-earned money into safer assets such as Exchange Traded Funds, or ETFs (a basket of stocks, bonds, commodities, or a mixture of each, which offers diversification), or into stable, mature companies (in general, these companies are well-established in their industries, with a well-known product and/or service, as well as a loyal following) that pays out a dividend to their shareholders on a regularly basis. There are pros and cons to investing in such companies – one of the pros is that because they are very stable investments, the possibility of the company going out of business is very low and hence the risk is relatively small; on the other hand, in terms of capital appreciation (i.e. the difference between the current share price and the share price which they had invested in the company, multiplied by the number of shares they had) is small, due to the fact that further growth opportunities is limited.
On the other end, there are individuals who may prefer to invest their money in growth companies (in general, these are companies that are able to grow their revenues and/or net profits at a rate faster than the market as a whole.) Many of such companies tend to keep a huge bulk of their earnings to further grow their businesses (instead of distributing them as dividends.) However, as their business grows, their share price will climb as well (which leads to a much better capital appreciation opportunity compared to investing in stable, mature companies.) Despite that, one will need to take note that in terms of risk, it will be comparatively bigger than stable, mature companies in that these companies tend to take up a huge amount of debt to finance their business growth and if not managed well, they may run into cash flow problems (in servicing their interest payments) and eventually end up bankrupt (when that happens, you may potentially lose all your money.)
Finally, there are individuals who like to have the best of both worlds, where there investment portfolio consist of both stable, mature companies, as well as growth companies in a different ratio (could be 50:50, 60:40, 70:30, etc. – you get the idea here.)
So, which group do you belong to? The best person to answer this question is yourself, where you need to ask yourself a few questions – including what you want out of your investments (whether is it one that is able to give you ‘pocket money’ in a form of dividends on a regular basis, or one that can generate for you maximum returns on your initial investment when you divest your shareholdings down the road, or a mixture or both), along with your risk appetite (whether your personal character is one that is more risk-averse, or one that is inclined towards taking risks.) Based on that, you can then create a shortlist of companies that you could potentially invest in, study them in detail (you should never invest in any company you do not already have a good understanding in), and then patiently wait for an opportune time to invest in it. It is extremely important one do not blindly invest in a company just because someone you know has shareholdings in it (simply because what they want out of their investments, along with their risk appetite, are likely to be different from yours.)
With that, I have come to the end of my short share today. I hope you find it useful, and here’s wishing you a fruitful week ahead!
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