I thought I’d start off the blog by posting key things investors must remember to help stay on the narrow path. Here are my initial thoughts on the top ten. Perhaps we can add to the list – what do you think?
1. If you do not understand do not buy it.
View shares as part ownership of a business, not as gambling counters in a game of chance. Be a business analyst trying to understand what makes it tick, rather than a share analyst.
2. The thoughtful, dedicated private investor can out-perform the professional
They have many advantages, including concentrating a portfolio on the few best investment ideas, taking the risk of being different from the herd, and finding good companies in everyday experiences.
3. The market is there to serve you not to guide you
Many treat market prices as a guide to the value of a share. The market, in its manic depressive fashion, often sets prices that are far from the true value of the business. Be independent, evaluate firms and exploit market prices rather than be led by them.
4. Invest don’t speculate
An investor thoroughly analyses to understand the business, only buys when reassured on the safety of the principal and aims for a satisfactory return, rather than over-reaching for extraordinary returns. Operations not meeting these requirements are speculative. Speculators focus on guessing short-term price moves. They do not thoroughly analyse a company, do not factor in a margin of safety and do not look merely for a satisfactory return, but stretch the risk boundaries in targeting extraordinary returns. Speculators actually think they can spot the bottoms and tops, and buy or sell appropriately. The great investors state that after decades of experience that they do not have a clue where the market is headed over the next 6-12 months, yet punters with one-hundredth of their experience think they can do it! Share prices have a strange psychological effect on the speculator: they demand more when the price has risen and demand less when the price has fallen.
5. Don’t pay high fees
Fund managers can take away the bulk of the investment gain. Fees of 1.5% sound low, but can remove one-third of your gain. A fund manager charging 1.5% p.a. better pack some real dynamite, when ETFs charge only 0.3% and you have the option of creating your own portfolio with no management charge
6. Margin of safety
When valuing shares expect to arrive at a range of reasonable intrinsic values rather than a single point. If that range is £2 to £3 do not buy if the current price is £1.95 - that is not a big enough margin of safety to allow for analytical errors or business vicissitudes.
7. Diversify, but not to mediocrity
You are vulnerable if you invest in only one share, so diversify. Beyond 10 the benefits of further diversification become small. Better to concentrate your knowledge and hone your analytical edge. Stay within your circle of competence.
8. Stock market mispricing knowledge
Become aware of the remarkable findings in academic papers on whether the stock market can be beaten. On the whole they find that it is very difficult to outsmart the markets (that is, performing better than just buying a broad spread of investments and going to sleep for a decade or two). However, there are some nuggets of gold hidden in the academic jargon and maze of statistics. The findings provide rigorously-derived corroborative evidence of what many great investors have been telling us for decades, and, in some cases, take things a little further.
9. Read the philosophies of the great investors
Learn from their hard earned experience of what works and what does not. Learn from their mistakes – you can’t live long enough to make them all yourself.
10. Enjoy the journey as well as the proceeds, because the journey is where you live.
Enjoy your investing. If you don’t enjoy it then hire someone else to do it for you (if charges are reasonable).