1. What Kind Of Return Should You Aim For ?

This is the first question you need to ask yourself. Fortunately it is not difficult to answer.

It depends on two things :

(a) how much is your annual salary ? and

(b) how much money do you need to sustain your family ?

Your targeted return should be the lower of (a) and (b) above.

For example, if your annual salary is RM100,000 and your annual household spending is RM150,000, your targeted return should be RM100,000. The reason is very simple : if you stick to your old job, your family is surviving based on your RM100,000 income anyway (maybe all this while your spouse is contributing the remaining RM50,000). There is no need to target for more income just because you have a new career (doing full time investing at home). It will only stress you out and make the whole thing unsustainable.     

Conversely, if your annual income is RM300,000 and your annual household spending is RM150,000, your targeted return should be RM150,000 only (being the lower of the two). There is no need to aim for RM300,000. It is the same reason again - aiming too high will only stress you out.

2. How Much Capital Do You Need ?

Of course, the more the better. The bigger your portfolio, the less percentage gain you need to achieve the targeted return.    

Based on targeted return of let's say, RM100,000 per annum, I would suggest start up capital of let's say, RM1.5 mil. This figure is not based on any scientific reasoning. It is plucked from the air : RM1 mil is too low (not enough cushion) while RM2 mil seemed a bit out of reach for most people.

3. Managing Your Cashflow

You are dealing with equity, not fixed income. So there is no certainty that the money will come in regularly. You need to manage your cash flow.

First of all, you will have dividend income. I don't purposely pick stocks that pay dividend. For me, prospective EPS is the main criteria as I am aiming for capital gain through earning growth. However, every now and then, I will receive dividend as a byproduct. If you have a RM1.5 mil portfolio, it is not difficult to receive RM20,000 dividend per annum. It represents yield of only 1.3%. Many PLCs pay more than that (don't punt rubbish stocks lah).   

Then you are left with RM80,000 to cover. Based on portfolio of RM1.5 mil, that represents return of 5.3%. Now the question has become : do you think you can generate that kind of capital gain per annum ? Different people has different answer. But in my opinion, many people in i3 can achieve that. 

The 5.3% return will not be delivered to you in a regular manner. In my case, I registered losses in my first year. Only in my second year did I hit pay dirt. That represents a drought period of closed to 12 months. During that 12 months, I drew down my capital to pay for expenses. It was a scary experience as you see your net worth gradually shrinks.

But the drought finally ended when the stocks I picked started bearing fruits (12 months after I quit my job). And the profit came in like a flood. It not only replenished my depleted capital base, but also allowed me to cover some of my future expenses. The feeling of relief is priceless. I will forever remember it.              

That is the nature of Full Time Investing. Profit comes in an erratic and lumpy way. There could be a period of drought before you get to enjoy the fruits of your labour. So be mentally prepared for it.

4. Growing Your Capital Base

So you are quiting your job and venturing out on your own. Are you going to spend the rest of your life trying to squeeze out RM100,000 every year from your RM1.5 mil portfolio ? Is that a sound career plan ? What happen if there is a market downturn that lasts for an extended period of time ? What will happen to your net worth ? Your portfolio size shrinks by 50% (from RM1.5 mil to RM0.75 mil) and you are drawing down RM100,000 per annum. Within one to two years, you are left with only RM0.5 mil. That is not a lot of money at all. Either you need to come out to look for a job again (which will not be easy after a few years' break) or you will be living in fear everyday worrying about your finances.       

At this point, it should be clear to you that doing full time investing to merely cover your family's expenses is not a viable undertaking. Due to volatility of the equity market, it is risky and likely unsustainable over the longer term. Your portfolio needs to do better then that. Much much better.

AS A FULL TIME INVESTOR, YOUR ULTIMATE OBJECTIVE IS TO GROW YOUR CAPITAL BASE TO BECOME SO BIG THAT YOU WILL FOREVER ACHIEVE FINANCIAL INDEPENDENCE.  

5. A Three Stage Process

To achieve the above, a Full Time Investor's career actually goes through three stages :-

Stage 1 - Scraping By

In the example above, a portfolio size of RM1.5 mil attempts to generates return of RM100,000 per annum. This stage is not fun. You are managing your portfolio to try to cover your daily expenses. Due to the small capital base, you will feel the pressure to achieve superior return, just in case next year you are not so lucky and you make less money.

You will also have to constantly worry about protecting your capital. RM1.5 mil is not a lot of money nowadays. Make one big mistake and you will need to go back to work for your old boss.

Stage 2 - A Comfortable Life

To reach Stage 2, your portfolio needs to grow to let's say, RM4 mil. At this size, your portfolio can easily generate RM100,000 to RM200,000 return per annum without having to try very hard. There is less pressure for you to score big. As a result, you can just relax and park your money in some quality second liners or blue chips.  

There is also more room for error. You can loss 20% and yet no need to worry too much about long term sustainability.

But you are still not quite there yet. You are still susceptible to 1997 style market meltdown that can break your back. You need to move up to Stage 3.

Stage 3 - Financial Independence

To reach this stage, you need let's say RM6 mil. That is RM2 mil more than Stage 2. RM4 mil will be used to generate return as per Stage 2. The additional RM2 mil will be held in cash form (FD, etc). It is for you to bargain hunt in the event of a CATASTROPHIC MARKET MELTDOWN like in 1997 (2008 is a walk in the park).     

The availability of RM2 mil capital during crisis will make you very very rich. In other words, you are now immune to any Financial Crisis. That is why reaching Stage 3 will make you forever Financially Independent. You have reached the Peak of Mount Everest. 

6. Managing Your Portfolio

Many of the things I said above are important, but they pale in comparison to what we are about to discuss in this section - how to make money from stock market. If you cannot make money from your investing activities, your Full Time Investing career will not be sustainable. FortunateIy I have already covered this topic before, in my article dated 12 June 2018.

https://klse.i3investor.com/blogs/icon8888/160956.jsp 

One thing I would like to further elaborate is diversification. In that article, which is directed towards a broad spectrum of readers, I suggest that we should diversify our portfolio so as to eliminate risk and stress as much a possible. For Full Time Investor, I maintain the same piece of advice, but with a slight twist :- 

You should diversify during normal time. However, when the right time arrives, IF YOU SEE A CHANCE TO HOOT KAU KAU, MAKE USE OF IT.

Otherwise, you cannot grow big and achieve Financial Independence.

Did I confuse you ? Don't be. Let me provide you with an example :           

At the beginning of 2016, I spread out my investment in 15 different stocks, each with small position. As much as I want to grow my portfolio fast (for reasons as elaborated in Section 5 above), I did not dare to simply punt big on any particular stock. Not that I didn't want to do it, it was just that the condition was not ripe yet. I didn't have sufficient visibility.

In May 2016, Air Asia reported strong result. I allocated 15% of my funds for the stock (diversification is no more the top priority). In October 2016, Tony Fernandez proposed to subscribe for huge stake in Air Asia for RM1 billion. At the same time, there were news flying around that Air Asia will be disposing its leasing unit and pay out huge dividend. Shortly after that, Air Asia announced another set of strong result.

Putting all these positive development together, I increased my exposure to 30% of my portfolio.

As we all know, Air Asia subsequently went up to RM3.50. That helped my portfolio to achieve above average return in 2016. 

What I am trying to say is this : don't listen to people telling you to have a concentrated portfolio so that you can increase your wealth fast. It is risky because it can work both way. This is especially the case for Full Time Investors who are now relying solely on investing to provide for the family. Preservation of capital is equally important as growing your capital. As a result, it is advisable to have a diversified portfolio MOST OF THE TIME, and only ramp it up when visibility is good and opportunity presents itself.

7. Concluding Remarks

(a) At the beginning of this article, I mention that you need start up capital of RM1.5 mil to RM2 mil. However, it is not something cast in stone. It depends on many factors such as your age, your annual finanical needs, the ease of you getting back to work force, etc (if it is very easy for you to get back your job, you can go full time investing even if you have only RM100,000 capital, right ? There is nothing much to risk). In general, I would say that you need capital equivalent to 5 to 10 times of your annual financial needs. The more the better.

(b) We are talking about Full Time Investing, not speculating. The whole idea is to do it properly such that your portfolio can grow by leaps and bounds within several years (to reach Stage 3). I am not against speculating (intra day trading etc). Any cat that catches mice is a good cat. However, I doubt that speculation can allow you to grow your portfolio systematically. At most, it can help you to meet your daily expenses, which as mentioned above, is not sufficient and not a sustainable way to manage your finances over the long run, especially if you have a family to take care of.

(c) To grow your portfolio big time does not mean that you should act recklessly and take risky positions. Don't always think of getting rich quick by betting big. It doesn't work that way. There is no direct correlation between risk taking and superior return. Be calm and steady - 80% of your time (let's say), you should have a diversified portfolio. Shop around, pick up small positions in good value stocks (3% to 5% of portfolio) to feel the pulses of the market. When the timing is right, unleash your animal spirit to try to make a killing. There is no textbook or formula on how to do it. You have to figure it out yourself, sorry.

(d) Stick to i3. I have mentioned many times before, through sharing information and opinion, many i3 members have become above average investors. Tap the wisdom of the forum. I would say that it is one of the most critical factors for becoming a successful Full Time Investor.

(e) Last but not least, by quiting your job and going full time investing, never allow people to accuse you of "lazing at home to play the share market". That is very demoralising. You don't deserve that. Tell yourself that you are venturing into a business. In a certain sense, that is true. You are coming up with sizable capital to nurture something so that one day you can reap huge economic benefits out of it. If that is not business, then what is business ? Treating full time investing as a business will give you a sense of direction and vitality. It makes you feel good. A positive mindset enhances your chance of success.

Good luck !!!