I’ll never forget this chat.
It was March 2020, just before Singapore’s Circuit Breaker lockdown. I was sitting across from my good friend, John (not his real name) at Starbucks, tucked away at the corner seat by the window, overlooking Suntec City’s Fountain of Wealth.
The world felt tense. The air was a mix of roasted coffee beans, fear and a tinge of adventure.
I said to John: “Look, it’s not interest rates that kills you, it’s the margin calls.”
John wanted to invest on margin with the current panic selling. This means borrowing money from stock brokers to buy stocks. I advised against it. Why?
The reality with excessive leverage is this: It’s not the thousand little cuts that kill us. It’s the sudden, violent punches of the market crashes that will wipe us out. I’d avoid excessive leverage.
If we’re going to enjoy safe, secured compounding returns from my investments, We’ve to first survive the sudden, violent punches of the stock market.
And the secret to surviving the savage market today is to have staying power.
Since 1928, the stock market has gone through 22 bear markets. This includes the most recent COVID-19 pandemic and Ukraine War. However, over this last century, the stock market has also recovered – and gone even higher.
This was despite war, natural disasters and financial crises.
What’s more, the average bear market lasts less than a year – around 340 days.
If you borrow heavily, you risk being wiped out before the recovery even starts. When you stay invested, your returns compound better.
A $10,000 investment over the last 20 years would have turned in $71,000.
A $10,000 investment would reduce to $32,000 if you had missed the 10 best days — either having wiped out or panicked sell.
And the more days you missed, there’s a real chance you’ll miss the recovery. That can cost you.
Which means you might be selling off some of your most important investments at the wrong time.
What I’d do today is reduce excessive leverage – whether it’s margin or derivatives on your portfolio. And I’d stop taking up any more leverage. If you’re forced to sell from margin, at the market bottom, you’re very likely to miss the explosive recovery that follows.
What you need is staying power.
Surviving, not timing the bear market matters so much. Because when you can do that, you can greatly compound your capital for the long term.
Speaking of compounding, I’ll be flying to Omaha this week to attend Berkshire Hathaway’s AGM May 2024.
And if you’re going, or know anyone going this week, drop me an email — love to connect!
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
