In the book, How much is enough? by Arun Abey & Andrew Ford, they lay out the four golden principles of investing. They are quite simple and easy to follow. They are not new either but sometimes we lose sight of them, especially when FOMO takes over and we want large returns instantly.
It is quite simple, invest in quality companies. Their value will down in value at times but we know they will come back. Apple, for example, fell by -29% this year. Are investors worried that the world’s biggest company; a company that has continued to exceed earning expectations despite its fall in stock value is now a busted flush? Not at all. We are confident that the value of Apple will come back because it is a quality company. Invest in quality and you know you will do well over the long term.
Warren Buffett is a master of buying at value; that is a good price. There are many different ways to calculate the value of a company and what the share price should be. Most retail investors don’t know how to do that though. So for your average investor at home, it comes back to quality and not losing the run of yourself. That means not investing in GameStop when its share price is going through the roof. A lot of companies that saw huge growth over the last numbers of years have seen falls in their stock price of between 70-95% this year alone.
You may not be able to calculate the P/E ratio of a company but do a bit of research before you buy. See if a company is profitable or living on debt. Read up about it. Buying stock because you use the company’s product or you read about it in the paper should be the start of your buying process, not the end of it.
Quite simply, don’t put all your eggs in one basket. And that doesn’t just mean don’t invest in just one company. Don’t invest in just one industry either. In the last calendar three years, the Nasdaq 100 index, has returned 36.59%, 35.94% and 41.32% respectively. Its return year to date this year is -11.67%.
Over the same period, the Invesco Energy Exploration & Production ETF has returned 108.7%, -42.02% and 0.10% respectively. Year to date, it has returned 76.44%.
It is impossible to predict which asset class is going to be the winner in any given year. So don’t try. Pick a bit of them all. You won’t have the best performing asset class in any year but you will never have the worst either. You will spread out your risk.
Time is your friend. If you have applied the previous three principles, leaving your investment over time will likely result in you seeing a positive return from your money. It may produce a negative return in the short term but that is because your money has not had the opportunity to grow.
If you did not follow the previous three principles, do not think that if you hold onto a poor quality investment for long enough that it will come good eventually. You are better off cutting your losses and reinvesting what you get back into quality assets that will grow over time.
08 August 2022