Special Report
10 Steps to Making a Million Dollars in the Market
The Motley Fool Special Report -- 2014
10 Steps to Making a Million Singapore Dollars in the Market
It should be the target of every ordinary investor -- to make a million Singapore dollars from shares.
Just think. Your S$1 million portfolio could mean…
…no more work,
…no more worries,
…and the financial freedom you've always dreamt of.
But can anyone become a stock market millionaire?
Well, let's face it -- for most people making serious money from shares will always remain a pipedream.
Simply put, earning life-changing sums from the stock market requires time, effort and sacrifice -- and most people prefer to take what seems like the easy option, only to wonder, years down the line, why they're no better off.
But you, however, would appear to have a different approach to your financial well-being.
By requesting this special free Motley Fool report, you've already shown an interest in shares and a desire to improve your wealth. What's more, by requesting this report, you've already indicated an ambition to work hard for the potential significant rewards.
So clearly you seem the sort of person who:
? Wants to know about shares;
? Wants to invest over time; and
? Wants to adopt a mind-set that can help create a possible S$1m portfolio.
So let's get straight to some calculations, and provide you with some inspiration.
Look at the figures in Table 1 below.
The numbers, particularly the large one in the bottom right-hand corner, are little short of staggering:
Table 1: The sensational creation of wealth from regular annual contributions and high investment returns
Year
|
Opening Valuation (S$)
|
Investment(S$)
|
Total(S$)
|
Growth at 15%
|
Closing Valuation (S$)
|
1
|
-
|
10,000
|
10,000
|
1,500
|
11,500
|
2
|
11,500
|
10,000
|
21,500
|
3,225
|
24,725
|
3
|
24,725
|
10,000
|
34,725
|
5,209
|
39,934
|
4
|
39,934
|
10,000
|
49,934
|
7,490
|
57,424
|
5
|
57,424
|
10,000
|
67,424
|
10,114
|
77,537
|
6
|
77,537
|
10,000
|
87,537
|
13,131
|
100,668
|
7
|
100,668
|
10,000
|
110,668
|
16,600
|
127,268
|
8
|
127,268
|
10,000
|
137,268
|
20,590
|
157,858
|
9
|
157,858
|
10,000
|
167,858
|
25,179
|
193,037
|
10
|
193,037
|
10,000
|
203,037
|
30,456
|
233,493
|
11
|
233,493
|
10,000
|
243,493
|
36,524
|
280,017
|
12
|
280,017
|
10,000
|
290,017
|
43,503
|
333,519
|
13
|
333,519
|
10,000
|
343,519
|
51,528
|
395,047
|
14
|
395,047
|
10,000
|
405,047
|
60,757
|
465,804
|
15
|
465,804
|
10,000
|
475,804
|
71,371
|
547,175
|
16
|
547,175
|
10,000
|
557,175
|
83,576
|
640,751
|
17
|
640,751
|
10,000
|
650,751
|
97,613
|
748,364
|
18
|
748,364
|
10,000
|
758,364
|
113,755
|
872,118
|
19
|
872,118
|
10,000
|
882,118
|
132,318
|
1,014,436
|
Total
|
|
190,000
|
-
|
824,436
|
1,014,436
|
Now before you get carried away, Table 1 shows a projection outlining what's possible -- and certainly does not offer any sort of promise or likely outcome from investing.
As you should know, there are never any guarantees with the stock market. Share prices can fall -- and often fall heavily! -- as well as rise. Furthermore, the returns shown in Table 1 are taken before dealing costs and other expenses.
That said, if you:
? Invest S$10,000 every year, and;
? Able to enjoy a 15% return (more on that later) after costs every year…
…the sums show you would have turned total payments of S$190,000 into a magic S$1,000,000 during 19 years of stock market investing.
Of course, not everybody can set aside S$10,000 a year to invest in shares. And certainly not everybody will achieve returns of 15% a year for 19 years.
Indeed, the historical return from traditional stock market investing is something like 9% a year since 19001 and around 4%2 per annum for the decade ended 31 March 2012. The Singapore market has returned about 130% since 1999.
Step 1: Start Now
As such, Step 1 to making a million in the market is to simply Start Now.
Look at Table 2, which shows how long it takes to reach a million by investing S$2,500, S$5,000 and S$7,500 a year and enjoying returns of 5%, 10% and 15% per annum:
Table 2: Time taken to reach a million
Annual Investment
|
5% Growth a Year
|
10% Growth a Year
|
15% Growth a Year
|
S$2,500
|
62 years
|
38 years
|
29 years
|
S$5,000
|
49 years
|
31 years
|
24 years
|
S$7,500
|
41 years
|
28 years
|
21 years
|
S$10,000
|
36 years
|
25 years
|
19 years
|
Clearly the less you invest, the longer it will take to ever reach a million dollars. So the earlier you can start placing your money in the market, the better your chances should be.
Step 2: Spend Less Than You Earn
That brings us neatly to Step 2 to making a million in the market, which is to Spend Much Less Than You Earn and Invest the Difference.
Now, too many people these days complain about not having enough money for saving and investment… you know, your neighbour, your work colleagues, family members, and so on.
But funnily enough, somehow many of these people have the means to buy that new car, travel on that exotic holiday and purchase that latest computer gadget.
But spending your cash on such short-term luxuries isn't going to help you create life-changing wealth from the stock market. Indeed, if you're really serious about becoming a stock market millionaire, then you have to make a serious commitment to your spending. In particular, you'll need:
? To calculate what you can realistically afford to invest each month, allowing for unexpected bills and emergencies.
? To be willing to trim your current expenditure, remembering that every penny saved is a penny earned -- and that such savings can also be invested over time and can count toward your million.
? To be disciplined enough to fund your investment contributions by autopay, so you're not tempted to blow your surplus cash.
? To commit to those regular payments over a long-term time frame -- so there's no cutting corners and/or giving up when the markets undergo a bad patch.
In our view, if you can adopt this necessary spending mind-set, then you really could be on your way to building a sizeable share portfolio.
Step 3: The Beauty of Tax-Free Status
Here in Singapore we are in an enviable position because we don't pay tax on the money that we make from investing in shares. We don't have to pay tax on our capital gains or the income we receive in the form of dividends, either.
But people in other parts of the world are not nearly as lucky as we are. They have to jump through numerous hoops and over various hurdles to make a million dollars. That's because they are restricted by how much money they can make before they are hit by capital gains tax. We are not.
So don't take your tax-free privilege for granted. It's a great way to build a nest egg and get a head start on people in other parts of the world.
We also have an excellent savings scheme called the Central Provident Fund that obliges us to put money aside for our education, retirement, medical expenses and buying a home. Saving money is a great discipline. But now that you have saved it, the next step is putting it to work to make even more money for you.
Step 4: Shares Beat Funds
Let's move now to Step 4 and why you might want to Forget about Large Funds and Buy Individual Shares Instead.
It stands to reason that making a million dollars from the market requires superior returns.
So if you're determined to become a portfolio millionaire, then you need to concentrate on the very best opportunities for wealth-creating profits -- and in our experience, the very best individual shares almost always beat the returns from the very best managed funds.
Of course, collective investment funds do have their attractions. Buying a fund effectively hands the stock picking over to an expert, who then does all the hard work for you. Own several funds, and you can easily establish an extremely diversified portfolio that shouldn't provide too much in the way of volatility.
But fund managers do tend to own quite a wide range of shares in their portfolios, thereby minimising the effect of any winning selection on the fund's overall performance.
And the larger the fund, the less nimble it can be picking the very big winners we seek.
Consider Neil Woodford, who used to run the U.K.'s largest unit trust, the £11bn Invesco Perpetual High Income Fund, till April 2014.
Now Mr Woodford is a very accomplished investor. In the decade ended 31 March 2012, for instance, he's managed to advance his High Income fund by about 9% per annum-- versus just 4% per annum for the FTSE All-Share index.4
So you may think Mr Woodford's 5% point average annual outperformance isn't that bad. But during the same 10 years, Mr Woodford's High Income fund was trumped by at least 1,004 different shares within the FTSE All-Share index -- some of which rocketed by 1,000% or more.
Step 5: You Can Beat a Flat Market
That brings us neatly to Step 5 and Recognising the Potential for Tremendous Capital Gains in a Difficult Market.
We've already highlighted the wonderful potential compounding effect on your money from enjoying 15% annual returns. But we recognise 15% returns every year may sound impossible, especially as we've noted how the wider stock market has trundled along with 4% average annual returns for the past 10 years.
But it's important to realise that individual companies can still prosper -- and their share prices can still produce outstanding gains -- even when the stock market as a whole remains in the doldrums.
Just take a good look at Table 3:
Table 3: Great ‘multi baggers 5
Share
|
Capital Gains (%)
|
Annual Return (%)
|
Jardine Strategic Holdings
|
592
|
21.3
|
Jardine Cycle & Carriage
|
592
|
21.3
|
Genting Singapore
|
565
|
20.9
|
Golden Agri-Resources
|
524
|
20.1
|
Sembcorp Marine
|
497
|
19.6
|
Jardine Matheson Holdings
|
436
|
18.3
|
Hongkong Land Holdings
|
324
|
15.5
|
Singapore Exchange
|
314
|
15.3
|
Keppel Corporation
|
233
|
12.8
|
Noble Group
|
197
|
11.5
|
Every one of those 10 shares ballooned by at least two-fold during the past 10 years -- and generated average capital gains of around 17.7% or more per annum. Certainly buying one or two of those particular companies back in 2002 could have really set your portfolio motoring and put you well on the way, perhaps, to making a million in the market.
That said, most of those 'multibagger' shares may not be that familiar -- even after their superb gains. For example, Noble Group was only founded in 1987 and relatively little known 10 years ago given its headquarters in Hong Kong. Today, though, it is one of the largest companies on the Singapore Exchange with operations in more than 140 locations around the world.
Golden Agri-Resources was only founded in 1996 and listed on the Singapore Exchange in 1999. Today it is the second-largest palm oil plantation in the world.
Yet market history tells us that you can also create serious wealth from more familiar names and products. Jardine Cycle & Carriage is an obvious example from Table 3. Table 4 lists another two opportunities from the past 10 years that produced respectable returns for loyal shareholders:
Table 4: Super returns from well-known names6
Share
|
Capital Gains (%)
|
Annual Return (%)
|
Sembcorp Industries
|
297
|
14.8
|
SIA Engineering
|
134
|
8.9
|
On the face of it, maintaining aeroplanes doesn't sound like a fantastic growth stock, and neither does marine and offshore engineering. But SIA Engineering and SembCorp Industries have generated steady capital gains of 134% and 297%, respectively, for shareholders since 2004.
All told, some 10 shares currently within the Straits Times Index’s 30 shares have produced annual average capital gains of 12% or more during the past 10 years with many more examples outside Singapore’s market benchmark having that kind of return too.
And if the next 10 years see the stock market perform somewhat better than the last 10, then perhaps we could witness a lot more than 50 names deliver 12% per annum average capital gains by 2024!
Step 6: Reinvest Your Dividends
As well as capital gains, shares can also enhance your wealth through the regular payment of dividends -- which brings us neatly to Step 6 to making a million in the market, which is: Harnessing the Full Power of Reinvested Dividends.
Many shares on the stock market pay out dividends to their investors. While these cash payments may initially be small in relation to the capital value of the investment, reinvesting them into yet more shares can dramatically enhance your portfolio's return.
Let's look at Jardine Cycle & Carriage, one of the aforementioned success stories of the past 10 years. We've already seen in Table 3 how that share recorded a 592% capital gain since 2004. But along the way, shareholders received regular dividend payments that could have really turbo-charged the investment.
In fact, had you bought more shares with every dividend payment, a Jardine Cycle & Carriage investment 10 years ago would have since grown by an amazing 843%8 -- equivalent to an average compound total return of 25.2% a year!
Chart 1 shows the incredible difference such additional dividends can make on the path to a million. Invest S$10,000 and then enjoy Jardine Cycle & Carriage's 592% capital gain -- but spend all the dividends you receive -- and you'd see your money grow to around S$69,000.
But invest S$10,000 and then sit back to enjoy Cycle & Carriage's total, dividend-reinvested 843% return, and your pot would have surged to close to a hundred thousand Singapore dollars. Just like that!
That extra potential $S28,000 could certainly make all the difference in achieving a landmark S$1 million portfolio.
So as we saw in Table 2, the greater your percentage returns, the quicker your portfolio could grow toward that magic million. As such, reinvesting dividends is essential for investors determined to create superior wealth.
Step 7: Think Different
Step 7 to making a million in the market -- Think Different to Other Investors -- could be the most difficult to achieve.
You see, good old human nature always tells us there is 'safety in numbers' and what other investors are doing must be worth copying.
Yet following the crowd and buying what's popular might not generate the market-trouncing returns required for millionaire status. Just look back at Table 3 and those wonderful shares from the past 10 years. You'll notice two of the 10 multibaggers have a connection to 'natural resources' -- agriculture.
Now this may be hard to believe, but 12 years ago hardly any investor talked about growing demand for palm oil and sugar cane. Indeed, most commodity markets had struggled for some time before 2002.
In fact, investors 12 years ago were mostly pre-occupied with the ongoing dot-com collapse -- and watching famous names such as WorldCom crash and burn -- and guessing the long-term consequences of the September 11 terror attacks.
Yet anyone with the proper mind-set to make a million -- and who was thinking differently to other investors -- could have ignored all that back in 2002 and alighted early on unloved commodity shares and held on to make a packet.
That's easy to say in hindsight, of course, but not so easy to have achieved in reality when so few other investors were interested.
Step 8: Thinking Big While Investing Small
In addition to Step 7, you can always take Step 8 and Hunt for Bargain Opportunities Under The City's Radar. Take a look at Table 6, which lists yet another 10 names that have delivered outstanding returns during the past 10 years:
Table 6: More enormous winners from the past 10 years9
Share
|
Total Return (%)
|
Annual Return (%)
|
Ezion Holdings
|
7,082
|
53.3
|
Low Keng Huat
|
2,007
|
35.6
|
Baker Technology
|
1,823
|
34.4
|
CWT
|
1,493
|
31.9
|
Raffles Medical Group
|
1,357
|
30.7
|
PSL Holdings
|
1,172
|
29.0
|
Super Group
|
735
|
23.6
|
Second Chance Properties
|
647
|
22.3
|
Broadway Industrial Group
|
175
|
10.6
|
Now only three of these nine companies have a market capitalisation higher than S$1 billion -- yet all of them have grown at least eight-fold in size during the past 10 years!
In fact, our calculations indicate that, back in 2004, all 10 market caps were likely to have been less than S$250 million -- putting each share well into small-cap territory... and therefore below the radar of big fund managers.
Something else to realise on your quest toward a million Singapore dollars is that you don't only have to back the right industries to win big with shares.
We've already seen how many commodity- related companies have performed superbly, but the diversity of Table 6 emphasises how some ordinary businesses and niche operators can deliver handsome gains, too.
For instance:
- Ezion Holdings owns and charters offshore platforms and rigs.
- Low Keng Huat is a property-to-restaurant group.
- Baker Technology provides support services for the oil and gas industry.
- CWT started as a global logistics company.
- Raffles Medical operates hospitals and clinics.
- PSL provides ground engineering services to the construction industry.
- Super Group is a food producer specialising in coffee.
- Seocnd Chance operates clothing stores and shopping malls.
- Broadway Industrial manufactures foams and plastics.
None of these shares operates in a clear-cut 'growth' industry and none could ever really be described as 'the next Microsoft'. Yet with the benefit of hindsight, the combination of solid profit growth and a cheap share price could have generated terrific compound gains for anyone who pinpointed the big potential from such small ideas!
Step 9: Invest Long Term and Stop Over-Trading
Step 9 to making a million in the market is to Invest Long Term and Stop Over-Trading. The reason is simple enough: We believe the best returns generally come from the best opportunities -- and it's logical to assume these opportunities do not present themselves on a regular basis.
So once you've found an attractive and convincing opportunity, it makes sense to hold on for the long run -- rather than bank a quick profit and then wait in cash, or even switch into something with less appeal.
In fact, constantly chopping and changing your portfolio can rack up sizeable dealing costs, which can damage your returns and leave you with less money in your quest to a million.
To put the potential costs into perspective, imagine contributing S$10,000 into your trading account, buying a share, and enjoying 15% annual returns for the next 10 years.
By the end of year 10, your actual cash investment -- that is, S$10,000 less, say, S$25 dealing costs -- would have grown into S$40,354. So far, so good.
But now imagine the same S$10,000 contribution, but this time with the 15% returns produced by 'switching' from one share to another after every year.
Table 7 shows how the buying and selling costs could add up, assuming a S$25 dealing charge for every sale and every purchase.
Table 7: How dealing costs can hurt your returns
Year
|
Investment (S$)
|
Costs (S$)
|
Net Investment (S$)
|
Growth at 15% (S$)
|
1
|
10,000
|
25
|
9,975
|
11,471
|
2
|
11471
|
25
|
11,446
|
13,162
|
3
|
13,162
|
25
|
13,137
|
15,107
|
4
|
15,107
|
25
|
15,082
|
17,344
|
5
|
17,344
|
25
|
17,319
|
19,916
|
6
|
19,916
|
25
|
19,891
|
22,874
|
7
|
22,874
|
25
|
22,849
|
26,276
|
8
|
26,276
|
25
|
26,251
|
30,189
|
9
|
30,189
|
25
|
30,164
|
34,689
|
10
|
34,689
|
25
|
34,664
|
39,864
|
All told, this 'switching' portfolio would end up with S$39,864 -- some S$490 less than the investor who just bought and forgot.
Step 10: Hold Your Nerve
Our final step, Step 10, to making a million in the market is to... Hold Your Nerve. This is particularly important in volatile markets, whereby sizeable -- but temporary -- share-price falls can flush you out of great long-term investments just at the wrong time.
For instance, some of the biggest share winners mentioned in this report suffered enormous drops during the banking crash of 2007 and 2008. Just study Table 8, which lists five textbook examples:
Table 8: How five multibaggers suffered during the banking crash of 2007/0810
Share
|
Pre-Crash Peak
|
Crash Low
|
Peak-to-Low Drop
|
Noble Group
|
S$1.64
|
S$0.31
|
81%
|
SembCorp Marine
|
S$4.80
|
S$1.10
|
77%
|
Keppel Group
|
S$12.84
|
S$3.28
|
75%
|
Jardine Cycle & Carriage
|
S$22.00
|
S$7.96
|
74%
|
All these drops occurred within the space of 12 months, and it would be quite understandable if inexperienced investors simply panic-sold around the bottom.
Indeed, the psychological pain of watching your shares drop week after week -- without any sign of an upturn -- can prompt even the most seasoned investors to give up just at the wrong moment.
But had you kept your nerve and held on to those five shares -- and reminded yourself that markets can and do recover from major slumps -- then the rewards from the subsequent recovery could have been substantial.
Table 9 illustrates the significant potential gains that were on offer.
Table 9: How the same five multibaggers rebounded after the banking crash of 2007/0811
Share
|
Crash Low
|
Price 30 June 2014
|
Rebound
|
Jardine Cycle & Carriage
|
S$7.96
|
S$44.26
|
456%
|
Noble Group
|
S$0.31
|
S$1.37
|
342%
|
Sembcorp Marine
|
S$1.10
|
S$4.10
|
273%
|
Keppel Group
|
S$3.28
|
S$10.79
|
229%
|
So when the market as a whole next undergoes a seismic seizure and shares across the board tumble heavily, persevering through the downturn could pay off handsomely as and when any rebound occurs.
What's more, your route to the S$1 million milestone could be enhanced even further by perhaps taking advantage of much lower share prices. Topping up on your favourite holdings when the market is marking shares down left, right and centre could in time provide extra, wonderful gains.
The four shares in Table 9, for instance, all went on to register new highs following the banking crash and more than doubled from their lows -- in only five years!
Summary
By now you should have a good understanding of what's involved in making a million from shares.
As we said at the start, the route to life-changing wealth requires time, effort and sacrifice.
- You have to commit to a proper investing philosophy and forget about mainstream funds.
- You have to recognise that, even in tricky markets such as now, shares with enormous compound-growth potential can still exist. And they might be just ready and waiting for you to buy.
- Often, you'll have to invest away from the crowd -- in sectors that have been forgotten or in shares too small for professional funds to pick up on.
- Keeping your nerve -- and perhaps buying more -- when the market hits the panic button is crucial as well.
- Consistently reinvesting dividends and trying to keep trading costs to a minimum are other great ways of maximising your chances of reaching a million.
None of this is easy, of course, but none of it is impossible either -- for those with the right long-term, determined mind-set, that is. So isn't it time you took that first step -- and start now?
We think so, too.
