My Investing Mantra

I've realised I have never written a post to explain my investing mantra. So what is it?

Invest in companies with good balance sheet
I like companies with little to no debt.
I like companies that can generate hoards of cash from its operations.

Tagged: Sheng Siong, Design Studio, Raffles Medical Group, SATS

Stable and strong companies
I like companies that have stable results (not fluctuating).
And so due to that, I like companies that have resilient businesses.
I like companies that are so big and strong, that they've proven that they can ride out a great financial crisis barely unscathed.

Tagged: Telcos, Vicom, Sheng Siong

Returns to shareholders
I like companies gives consistent and stable dividends from its profits. Companies that pay dividends as a way to give back some returns to the shareholders.

And yes, cash is king to me. Dividends is important, and I'd only like that the company pays a sustainable dividend.

If it fulfils this requirement, then yes, dividend will become my passive income.

Why is this a passive income?

Isn't it left pocket right pocket? A zero sum game?

Let's make is easy: When I decide to invest in a company, I lay out my capital for the management of the company to make money for me.

It goes on to sell its products or provides its services and makes money. 

That's passive for me because they're the one running the company. All I did was to contribute my capital to own a tiny stake in the company.

And they'll help me make money. Out of which, part of the profits made on my behalf is returned to me in cash (dividends).

What's passive is the act of capital contribution with money being made on my behalf. Dividends are just the act of returning some of those profits.

So, Cash is King. Why do I say that?

Dividends are realised gains. Realised gains that cannot be changed by "market mood". My dividends received wouldn't suddenly diminish in value because of a suddenly "accounting irregularity allegation".

Because the market mood can affect all share prices, whether or not it actually affects the underlying business. But sensible dividends paid reflects the underlying numbers that are cold, hard and actual.

Example

==CREDIT CARD REWARD POINTS vs CASH BACK==

Dividends are like cash back earned. They're given monthly, and they'll never going to change once received.

Rate: 5%

Period: 1 year

Total spending: $100k

At the end of Year 1, I've spent $100k and received 5k in cash rebate (offset and earned).

Capital gains are like reward points. They act like promises that are perpetually changing and mean nothing until fulfilled.

Rate: 5%

Period: 1 year

Total spending: $100k

At the end of Year 1, I've decided to redeem my points.

Alas, the credit card company decided to revise their redemption catalogue and the rate is now 2.5% instead of 5%.

My points are expiring. I've no choice but to redeem my points at 2.5% instead.

You're lucky if they've merely revised the rate. How many times have we wanted to redeem our points, only to find the reward catalogue EMPTY?

Aiyoyo!

Maybe that's why I've always chosen credit cards with cash back. That gels perfectly with my investing mantra as well.