It’s funny how my portfolio updates and performance tracking posts generate so many views. It really is.
It takes me minimal time to write up those posts, since I track the returns on my own anyway, so it’s just cutting and pasting. It doesn’t take much effort to pen my thoughts either since I’m very well familiarized with the companies I own, and can write it off the top of my head.
Yet these posts generate so much more interests than other generic posts that sometimes take a lot more effort to research, find data, compile, analyze and present.
Since my recent post (TTI’s Portfolio Updates – November 2017), I’ve had some guys who have discussed your personal returns with me. It seems like everyone’s having a good year. Or at least those who bother to email me to show off a bit.
On IN, there are some guys with reported what… 40%, 50%, 70%, even 80% (gasp!) returns YTD! WOW!
Hmmm, on the other hand, it really makes one wonder if we are near the top of the bubble market created by the Fed. When everybody’s popping champagne and having a good time, that’s when we’d better be like Cinderella and make for the exits before the clock strikes 12.
With the incoming new Fed chair, we gotta worry if the transition will finally be the proverbial straw that broke the camel’s back.
I don’t try to predict what will happen though; in my experience that’s a futile effort. Knowing what I don’t know, is probably more important than knowing what I do know.
Well, I hate to be the party popper here, but here’s what I really think:
Having a single great year, is not going to make you rich in the long run.
For retail investors at least.
It might make you really rich if you leverage up, use OPM (other people’s money), like professional fund managers, leverage on 1 big idea, and BOOM!, do a go-big-or-go-home kinda move, and am proven right.
Kinda like John Paulson.
1 great idea, 1 great bold move, 1 big win, and subsequently, he’s been dead wrong all the way since the 2009 GFC. Yet, he remains a billionaire. (I think). Or at least a multi millionaire.
For retail investors, it doesn’t work that way unfortunately. Cos you have no fancy hedge fund 2 / 20 fee structure to insulate you from losses and glorify you when you win.
Retail investors who have had a stellar 40%, 50% type of gain in a single year, usually fall under 1 of these categories:
- Small capital
- Unusually large proportion of capital in 1 winning idea
- No long term track record
When your capital gets larger, that’s when you’d run into trouble trying to find that 1 gem in the rough. Sometimes, there isn’t even that 1 gem.
Someone on IN said that he is “100% invested” in Geo Energy Resources because it is a “high conviction idea”. Another commentor said that “high conviction means it’s a no brainer right, so must 100% in”.
Readers would know that I am optimistic about the company, and am vested since August last year and currently hold 500,000 shares.
But 100%?! Wow. Thank you very much for your support, but seriously 100%?!
I can only conclude that the 100% capital must be relatively puny.
And if there’s 1 thing I know about investing, it is that there are no no-brainers. If you think something’s “a clear no brainer”, guess who’s a level 1 thinker? (Read Howard Mark’s writings)
Does this mean there’s no hope for us, poor retail investors? Are we destined to be stuck at the bottom of the investing pyramid, feeding off scrapes from the pros?
There’s still the Eighth Wonder Of The World we can rely on!
When I googled “Eighth Wonder Of The World”, that’s the image that pops up:
Milford Sound in New Zealand, South Island.
Wow. That really looks like a piece of heaven on earth.
BUT, how come when TTI went, it looked like this:
Not quite the same right. Grrrrr…
OK, it’s still quite a nice place, with the myriad number of waterfalls, islets sticking out of the water, cool mist in your face etc., but nothing that resembles the Eighth Wonder pic on top.
And it’s really an inaccessible place to get to. It takes several hours by coach to get to and back from Queenstown. I’ve been to quite a few fiords, and this just doesn’t seem like it’s worth the effort, if I’d be honest.
In fact, I think Queenstown itself is even more beautiful. Queenstown is one of my favorite cities in the world, in my opinion, it ranks closely to Zurich and Zell Am See as the most livable places in the world.
Close fight amongst the 3 contenders:
Zell Am See
Damnit, how come I didn’t take a panorama of the lake and the city. Anyway, “See” = “Lake”, so the whole place is a series of interesting low-rise buildings littered around a mega lake, which is also bordered by mountains on both sides.
有山有水, what more can one ask for?
But I digress.
Milford Sound is NOT going to save the average retail investor.
The Eighth Wonder Of The World that really will….. is this:
The power of compounding returns year in, year out, over a long period of time, is what will make the average investor rich. Mega rich.
You don’t have to take TTI’s word for it. But if Einstein says it……………
This means instead of trying to shoot for the stars with a single year of unbelievable returns, we should instead focus on the avoidance of mistakes aka not a single year of terrible returns. (Something I’m guilty of! I’d one year of massive losses, in the quest for the 1 holy grail, the 1 idea that’d make TTI rule the investing world…)
I read somewhere that the human brain is not equipped to really understand compounding. (Einstein’s brain is not considered human)
Our brains think of things proportionally.
4 —> ???
Everyone can tell it’s 8000.
Our brains can visualize arithmetic, but somehow the effect of compounding is something that our brains cannot grasp easily. We have to illustrate the effects of compounding, and the illustration is what our brains can grasp.
So let me do exactly that, illustrate, with myself as an example.
TTI’s portfolio size for listed equities (excluding illiquid stuff like private equity, property etc), is…. I estimate, around SG$1.2mil right now. I am not sure exactly what it is right this instance. But just for convenience’s sake, let me round that down to $1mil.
Assuming I start now (at 35 yrs old), and stop/die/become retarded at 70yrs old, and if I can get an ROI of 20% annually, how much will this $1mil capital grow to when I’m 70 yrs old (35 years from now)??
Don’t play cheat, don’t take out a calculator to do the math.
Just guesstimate. Use your brain’s visualizing powers. Go on, make a guess.
Now, I’ve already primed you to think of an obscenely large number right? What, with all my pep talk about the human brain’s inability to understand compounding.
Still, the answer will shock you. (It shocked me)
|Yr||Beginning Capital||Capital at Yr End|
Answer: $591 million!!!
Wow. Ok, how many of you got a number that’s around that ballpark? Or more?
I would’ve thought it’s maybe…. $250mil or so.
So all I really need to achieve, is a 20% IRR every year, year in, year out for the next 35 years. Great.
And this is assuming zero capital infusion for the next 35 years.
It also excludes other possible assets like PE, property and other collections.
So putting all these figures and esimates together, is a $250 mil listed equities portfolio size by 2052 reasonable??
(LOL, this illustration is specially for my wife. She thinks I’m a dreamer. I think all achievements start from a dream)
Now, let’s paint another scenario.
Instead of an annualized 20% return for the next 35 years, what would the final figure be like if I had gotten :
YEAR 1: 10%
YEAR 2: 10%
YEAR 3: -10%
YEAR 4: 10%
YEAR 5: 60% (!!)
And repeat this 5 year cycle 7 times for the entire 35 years?
Would the figure be higher or lower than a consistent 20%?
Hmmm, seems like a close fight right? 10% ROI is not too bad, with a single bad year of -10%, but it’d be saved by an absolutely fabulous year of 60%.
There’s no doubt that if you are a professional fund manager, this 2nd scenario is much better. Why? Cos the year with 60% ROI would guarantee you primetime appearances on CNBC, your AUM would swell like mad, and people would throw money at you.
Coupled with 10% in most years, with only a -10% every 5 years…. that’d really put you at the top of the hedge fund world.
But for the retail investor…. guess which scenario is better?
|Yr||Beginning Capital||Capital at Yr End|
Answer: $95 million!!!
Vs $591 million in the 1st scenario with a consistent 20% return.
The difference is massive.
Of course, in both scenarios, the law of diminishing returns kick in as the capital increases. It’s easy to get a 20% ROI when you’re dealing with $100k. A 20% ROI when you’ve $10mil is another ball game. 20% when you’ve $100mil? That’s when you really need to start doing asymmetrical stuff that nobody else does.
So that’s it. The gauntlet is set. 20% for the next 35 years!
Now, let me get back to work.