Investing is hard. It is impossible to be on social media and not see investing porn such as ‘Holding Amazon from IPO would have gained…’ or ‘If only you’d bought Apple in 1993, you’d have…’
The problem with these quotes is that these stocks had very real and huge pullbacks, with Amazon losing the majority of its market cap several times and Apple seemingly at one point dead and buried (and not without good reason).
However, it is possible to outperform the market as an investor by developing some habits that many investors will never learn. They call themselves investors, then the price goes up 20pc and they sell. Humans are naturally inclined to want to be right, and booking that profit allows them to do so. But cutting winners early is never going to yield the large multibaggers that we all dream of.
Here are several themes great investors of the past and present share:
No – not the spoofy company HP acquired and subsequently had to write down – I mean taking responsibility for one’s actions and thinking for ourselves.
Many investors use search Twitter and the internet for tips. They want to be told what to buy. Why? Firstly, it absolves responsibility. That means if they lose money on the stock then it wasn’t really their fault – it was the tipster’s!
Secondly, they are lazy and cannot be bothered to put the hard yards in. Think about it – if you are simply repeating what everyone else is doing then you are going to get the same results. There is nothing wrong with keeping an eye out for good ideas (sometimes great ideas can come from your investing network) but if you really want to outperform then you need to get off the beaten track.
Not all investments are created equal. So why treat them equally? Ideally, our best ideas should be prioritised with more capital weighting. However, I am not saying put 100pc of your portfolio in your best idea – that is both silly and dangerous.
But if you want to beat the market and get above average returns sometimes you have to back your research and give yourself a chance. Holding a bunch of large caps and/or funds is not going to drive your portfolio hugely. There is nothing wrong with average stock market returns, and Warren Buffett does say most people should index, but if we want to be successful we need to put the hours of research in and back our conviction findings.
One advantage investors have is that they can choose to think of the long term time frame. Unless you print the absolute bottom in a stock, then it is highly likely you are going to be down on your investment at some point. The key is to ignore the current price, and think about what the business is doing.
One big example here is Pfizer, which during 1946 to 1956 made investors almost no money – despite the fact that the business was performing strongly. Those who got bought and sold missed out because from 1942 to 1972 investors made 141x their money. That is a gain of 14,000%. Had investors looked at the business itself and thought long-term, they would have been greatly rewarded, eventually. But it took time, and it tested a lot of peoples’ patience.
Learn more – earn more. The best investors habitually increase their knowledge, because they know there is always opportunities in the world and it is their job to be well versed on various industries and to improve their own process.
“If I have seen further than others, it is by standing upon the shoulders of giants”
Sir Isaac Newton
Warren Buffett is said to spend his entire day reading – yet there are many investors who do not pick up a book in an entire year. Perhaps there is a correlation there between his returns and their returns!
Cash is King
Great investors know that an investment is only worth the sum of its future cash flows, and if there are not any cash flows, then it becomes a gamble on the company ever achieving them.
Successful investors do not gamble or even have opinions – they let the quality of the financial statements tell them what to think. They look at the potential profits and how revenue can grow from its current base. They want to know just how profitable a business can really be, and what price they are currently paying for that business in terms of a multiple of the business’s earnings.
Understanding how cash moves through the business is a necessary skill in investing, because many companies rely on the begging bowl through the form of equity raises and placings in order to keep the lights on and keep the directors’ salary coming in.
There is a whole chapter on reading and understanding financial statements in my book, which you can download here.