WHAT I LEARNT AS AN INVESTOR

Transcription

1 WHAT I LEARNT AS AN INVESTOR BY GUERRIC DE TERNAY We all want to make money by investing our savings but investment seems confusing. We do not know how to organize our investment. Where should we start? How can we avoid losing money? The great world of finance is foggy. And fog impedes us from finding our way to profitable investments. It confuses us. I was 21 when I realized that I did not know anything about investment. Like most of us, I did not feel prepared to invest correctly my savings. The amount of information was scarring (so many investment vehicles, so many theories, so many opportunities, and so much risk). I decided to head into this foggy world in order to extract the key principles of investing. Today, I am sharing this learning with you. After interviewing financial experts and watching interviews for hours and hours, I have a better hindsight on how to invest. Key principles arose repeatedly. The goal of this ebook is to show that investment is not that difficult when you know the rules. Once you learn the key principles, everything becomes clearer and you start to understand how professional investors do. 1. If you have never invested, this ebook encourages you start your portfolio. You ll see. It s quite easy. 2. If you are already an investor, this ebook gives you the tools to analyze your experience and to spot how to learn from your mistakes. We will start this journey by getting a look at the common mistakes we all make. When I learn something new, I like to start with common mistakes. It helps to save time and gives practical advice. Although the list of mistakes we can do as investors is long, we will focus on the nine most common ones I spotted. Then, we will go for a 'learn from expert journey. Here, you will find out key principles I learnt from financial professionals. There are many successful investors out there. I selected two investors that have demonstrated their expertise: Jack Bogle and Warren Buffet. Copyright: Guerric de Ternay BoostCompanies 1

2 9 Common Mistakes Investors Make Mistakes often involve bad habits. And the problem is that even when we have noticed them, it is difficult to stop making the same mistakes. It requires commitment to change one s habit. I recommend you to read this chapter several times. Go through the whole ebook. Then, come back on this chapter every time you consider making a new investment. I intentionally presented this chapter as a checklist. Use it and it will improve your investment process. 1. Letting one s emotions involve Peter Lynch, the famous fund manager of Magellan, thinks that the key organ for investors is the stomach. You need emotional strength. Investing means taking risk. When you invest in the stock market, you have to be prepared to expect losing money. If you cannot handle this and taking risk prevents you from sleeping well, you should buy safer investments. Even professional traders can struggle to keep their emotional involvement away. It is hard to separate emotions from trading activities, especially when it is your money that is involved. Do not let your emotions destabilize your strategy. Volatility can be confusing. When you see on your smartphone that some stocks went down of 4% overnight, it can be tempting to sell. If your strategy was to hold these stocks for three years, do not sell them without proper analysis. Do not let fear turning your strategy upside down. Follow your strategy not your emotions. 2. Investing at the wrong time The trend is your friend, until the end when it bends. The trick with investing is to be patient through the small changes in price until you can identify the point when the trend makes a real change in direction. It s when a trend changes that investors should consider entering or exiting. To identify a change in trend, look to the stock s volume and price direction. More on boostcompanies.com 2

3 It is not always time to invest. Sometimes, the market does not present any opportunity. If you constantly invest, you will sometimes take a lot of risk for small rewards. Risk is part of the game. Yet, you should only take risk when the reward is likely to be significant. There are signs that tell you if you are too late: (1) when people are publicly too optimistic, (2) when the market is too high and (3) when market is bearish (on a downward trend) and there is no reason for this to stop. There is maybe nothing worse than bad timing. Best-case scenario: nothing happens and you just lose the chance to find a better investment. Worst-case scenario: the market collapses and you lose money. Buy when you notice a change of trend. In other words: Buy low. Sell high. 3. Investing in popular stocks Investing in popular stocks is also a matter of bad timing. Popular stocks are often overvalued making it less likely to buy low and sell high. Yet prices can still increase, so you must do your homework. Do not buy because it is popular but because you have found that prices will keep rising. Prices rose because every investor wants to buy these particular stocks now. If investors realize that prices are above the value of the company, they will sell and the price will drop as quickly. You are taking more risk when you buy popular stocks. Journalists cover every event that is related to popular stocks. Volatility is high and bad news can trigger a drop that you will make you lose money. So popular stocks are not the best investments, except if you have a really good reason to buy a particular stock. Look at stocks, which are not in the spotlight. More on boostcompanies.com 3

4 4. Acting on tips Someone a colleague, your brother-in-law told you to buy a particular stock because its price will increase. Do not blindly follow the recommendation, even if you trust him or her. Do your homework. The tip may be a track to follow. There must be a reason why rumor exists about a particular company. If something is happening, spot the trend. And act only on the basis of your own analysis. Do not act on tips. Do your own analysis. 5. Gambling instead of investing An investment strategy is necessary. You must define your goals (why do you invest?) and quantify them (amount of money needed + when you will need it). Once you know these, you can properly allocate your asset. If you need money in a while, you can afford more risk and volatility than if you need to pay for an MBA. Unfortunately many investors gamble and do not invest. You gamble when you randomly choose when you buy and when you sell. You gamble when you pick stock without knowing why. You gamble when you do not assess risk. By doing so, you increase the risk of losing money. Organize your investment. Know why you buy. And know when you will need to sell. More on boostcompanies.com 4

5 6. Thinking that past performance is guarantee of future results One investment rule is always true: the market is unpredictable. You cannot exactly anticipate how the market will perform. The stock market does not have a memory. Because it went down last week, this does not tell you anything about where it going to go in the future. You can spot a bubble but not when it will burst. The symptoms are always the same: prices are too high and assets are overvalued. But you cannot tell when the bubble will burst because the market is unpredictable. For example, in 1999, prices were already too high but the dot-com bubble only burst in March Past performance is an indication. It should not be the only reason for you to buy. 7. Avoiding diversification One big mistake is to put all one's eggs in one basket. The market is unpredictable. If you invest all your money in only one company and it goes bankrupt, you are also bankrupt. So diversify by buying different and unrelated investment vehicles (stocks and bonds; national and international; different industries...). Diversify your assets. More on boostcompanies.com 5

6 8. Ignoring broker fees Day trading is expensive because your brokers receive fees every time you buy or sell. You should also look at the management fees when you invest in mutual funds. Know what you are paying for. Follow a 'best selection' process and take into account all the services that your broker provide. Do not go blindly for cheap brokerage. If you pay peanuts, you get monkeys Pay attention to fees and make them as low as possible. 9. Looking in newspapers for next investments When it is on the news, it is often too late. Most of the time, professional investors will speak about their investment and encourage readers to buy because they have already taken position into the market. It is a way to encourage the movement they are expecting. Avoid newspapers and look for businesses by yourself. More on boostcompanies.com 6

7 3 Ways to Invest There are three ways to invest money: 1. Do it yourself You are good at picking stocks and you have time to do it. Awesome! Skip this chapter and go to the next one to find out what I learnt from Jack Bogle and Warren Buffet. 2. Let someone do it for you Like most of us, you do not have time to invest. Then you can find someone good at picking stocks, i.e. a fund manager that you trust, a financial advisor or your brother-in-law. Go to mutual funds with the goal of absolute performance (not beating the market). 3. Go to ETFs You do not trust anybody to manage your savings, not even yourself. That s okay. You can go to passive investment and buy ETFs. Basically, you choose a market (an index or an industry) and put your money into it. Some statistics show that it performs better than most of mutual funds. Mutual fund managers are critical with passive investment. They underline that investing in ETFs requires you to trust the market blindly. They also point out that you have to be prepared not to expect high return. But it is still better than choosing a bad mutual fund. More on boostcompanies.com 7

8 3 Key Principles I Learnt from Jack Bogle Bogle is the founder of Vanguard, an American investment management company. He popularized index funds investment and drove down the cost of investment. 1. Diversification - Diversify in bonds. Do not only own stocks. If the whole market goes down, you will be happy to have bonds. - Diversify internationally. Do not invest in only one market. A major political event can impact the national market. If your assets are internationally diversified, you will save some money. 2. Look for low-cost solution Bogle highlights that, because the market is unpredictable, cost is the only thing you can predict. Reducing the cost can help to make your investments more profitable. He advises to go for low-cost solution and to lower your taxes. He recommends buying index funds because they have low management fees. He also believes that index funds outperform most of the mutual funds. Because mutual funds are more expensive, they need better performance to be as profitable. Although low-cost solutions are appealing, I recommend not overlooking the quality. 3. KIS(S): Keep It Simple (Stupid) Simplicity makes it easier for you to manage your portfolio. It takes less time to follow two different index funds than to follow fifty different stocks. And it prevents you from being confused by large amount of information. More on boostcompanies.com 8

9 What I Learnt from Warren Buffet s Letters to Shareholders Buffet also called the "Oracle of Omaha" has demonstrated his expertise as the CEO of Berkshire Hathaway. Before being an investor, Buffet a talented entrepreneur. Thanks to his skills, he developed one of the most profitable mutual funds in the world. And when you ask him what does he do, he will simply answer that he allocates capital to companies. Buffet is also famous for his annual letters to shareholders. I read a lot of them and I learnt a lot. Let me share my learning with you. Investing is easier for us than for Buffet. Really? But Berkshire (Buffet s holding) has so much money. Yes and this explains why we can more easily invest. Buffet s opportunities are limited. He manages so much money that he can only go for deals which are big enough. We, as individual investors, are able to consider many opportunities. The stock market is not the only playground. You can also invest in mid cap companies, local companies or even your friend s company. Buffet did not start investing on the stock market. He started by buying good local companies at a fair price. Warren Buffet s Teaching We Can Apply as Investors Buffet is not the same kind of investor than we are. I found important to select learning that we can apply. There is not point to follow the exact same method than Buffet. We do not look for the same kind of investment than he does. When Buffet has to decide whether he will invest in a company, he asks himself two questions: - How much is it selling for? - How much do I think it worth? To answer to these questions, he looks at the business first and not at the price because he does not want to be influenced. Buffet reads financial reports. And then he determines the price of the company. If the stock prices are way less than how much he values it, he will consider investing. 1. Buy businesses you understand. You must understand the company s business because you need to know whether it goes well. E.g. Buffett does not buy technology stocks because he says he does not understand them. How can you tell that a particular business is great, if you do not understand the nuts and bolts of the industry? More on boostcompanies.com 9

10 So build your portfolio upon your knowledge (your work, your local places, you as a consumer). That is what makes you different from professional fund managers. You saw a terrific product in the super market? Invest in the companies that build them. Great companies build great products and services. 2. Buy great businesses. Ok and what is a great business? A great business is growing and must stay in the market for a while. You How to spot great business? - Look for business that succeeds repetitive sales. It is easier to sell to loyal customers than to acquire new ones. Being a wedding planner is not that easy (although it depends on your clients lifestyle). - Invest in business built on considerable competitive advantage. Economic castles make it harder for competitors to take market share. - Focus on institutions which can, disregard with the persons who are in charge, maintain their competitive advantage. Nobody is immortal. If the company totally embodies its CEO s personality, it reduces its chance to last. Questions to answer before investing: - Does the company have a consistent operating history? When it does, it shows that the company can operate in various business conditions. - Does the business have favorable long-term prospects? You should avoid companies business based on trends or technology that will be out of date soon. The first step is to spot great business. Then you have to do your homework to decide whether the price is reasonable. 3. Buy at reasonable price. As Buffet explains the important is being in the right business at the right price. Price is very important. Be greedy about the price. Buying cheap stocks create a safety margin. Although we cannot predict the market, we lower our risk when we buy undervalued stocks. If the business is great, it is likely that the price will grow. Buffet only buys stocks when he spots a good deal. One of the best moments to buy stocks is just after Wall Street got depressed, when everyone is still fearful. It is better to buy a great business for a fair price than a fair business for a great price. More on boostcompanies.com 10

11 Now: Start your Portfolio We are at the end of the first journey we spent together. You liked it? Let s stay in touch! Continue to read BoostCompanies.com and the monthly BoostLetters (subscribe here). You can also give me your feedback on Twitter (@GuerricdeTernay) or via guerric@boostcompanies.com. And remember: Becoming a great investor requires having the right process. Your strategy comes from practicing, learning and creating good habits. Come back to this ebook every time you have to do a new investment. It will help you to ask yourself the right questions and to avoid common mistakes. Guerric de Ternay. More on boostcompanies.com 11