Three Unbreakable Rules for New Investors

This article originally appeared on Dividend Titan's Weekly Wealth (Free Email Newsletter)

Two weeks back, I met my consultant friend of a small, mergers & acquisitions firm for coffee.

He's done well in listing companies -- making at least $50 million in revenue -- into the stock market.

This is the kind of man who values his time and knows his stuff about start-ups. We sat at a corner (enjoying the fresh aroma of a strongly brewed coffee) -- a bar table top overlooking Somerset Road.

"Willie, would you invest in Grab?", he cheekily asked.

So, here's what I told him.

I said, people who invest in the stock market cannot think like you -- investing in start-ups that have absolutely no profits.

And he said, "Isn't investing all the same?"

Different. You invest in private start-ups. You don't have to worry about stock prices collapsing. In March 2000, the NASDAQ crashed 77% and took the next 15 years to recover.

Worse still, companies that never made any profits failed to recover at all back then.

So I told him, if you want to invest in the stock market, this is what you should do.

My Three Unbreakable Rules for New Investors

1. Companies must have a long history of paying dividends -- about ten years.

This is important.

Because it immediately narrows your investment "universe". It's more manageable this way.

By doing this, you automatically prevent yourself from picking stocks that are speculative or overpriced.

And this greatly reduces your losses over time. But paying dividends is more than that.

You see, management of these companies must think carefully if they want to pay dividends consistently.

When management stops paying dividends -- investors get scared, the market gets scared. Shares will fall.

It's simply not good for the company.

So if a company commits to pay you dividends year after year, it's a sign that the company is confident to grow profitably in the future.

2. From dividend-paying companies, you must easily understand these businesses. And judge they have a durable, competitive edge.

I told my consultant friend: "Grab doesn't have any durable competitive edge".

It doesn't make money from a huge 'economies of scale', nor does it have any intellectual property -- unlike Microsoft software or patented medicine.

Anyone can create a platform company today with a lots of investors' capital.

A durable competitive edge must exist, so that a company's earnings can grow year after year.

That's how you grow your wealth -- Shares go up in the long run because it's supported by solid earnings. Grab has yet to make a single dollar of profit.

I'm not talking about trading here, but buying into a high-quality stock and holding it for years.

Some of the biggest companies I know obsess over growing earnings. Johnson & Johnson (JNJ) grew its earnings from US$515 million in 1984 to US$14.7 billion in 2020 -- a 10% annual growth in 35 years.

Its shares?

JNJ shares rose from US$2 to US$157 over that same period. That's a 7,376% gains over that same period.

And JNJ can do this because they have a durable competitive advantage.

3. Buy stocks only when they are at the right price.

I perform this test to make sure my portfolio is always at "low-risk".

This rule makes it much harder for you to lose money.

And you'll ensure that you can enjoy the benefits of compounding.

Because your entry price is smaller versus a company's future earnings. Imagine, if I'd bought DBS Bank at S$24 in 2007, I wouldn't make any money until 11 years later.

Source: Yahoo! Finance

So, this is what I've learnt after more than 10 years investing -- it's hard for anyone to beat compounding of high-quality stocks held for the long term.** **

And if you follow my three golden rules -- paying dividends, solid businesses with a durable competitive advantage, buying at the right price -- You can accumulate wealth safely and profitability.

Sometimes investing can be simple.

Always here for you,

Willie Keng, CFA

Founder, Dividend Titan

P.S. Would you invest in the new Grab-SPAC listing today? Drop me an email ([email protected]) I like to hear your views :)

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