Newspapers and airwaves are always full of information about successful investing, but how do you cut through to what really matters?
After nearly 40 years in the investment industry, I believe there are 10 things that all successful long-term investors invariably do. Good investors:
1. Know when to cut their losses or reduce their exposure
You know the feeling – a stock that you had high hopes for is heading south and you refuse to sell, thinking that its fortunes will surely turn around.
The share price eventually hits zero and the company goes into liquidation. You lose everything.
Good investors know when a stock is not living up to expectations and sell, taking the resulting loss on the chin.
The Australian stockmarket is littered with the corpses of companies that went belly-up after promising much: including Bond Group and Bell Group, Allco Finance, Babcock and Brown and, more recently, Quintis.
2. Know when to hold onto a good stock
Equally, there are many examples of companies that have done extraordinarily well over a long period and investors who held onto the shares, and resisted selling and taking a profit, have benefited hugely.
In many cases, shareholders who did their due diligence and were happy to remain long-term shareholders might have increased their investment more than 1000%.
The Australian example that springs to mind is CSL, which listed on the ASX in 1994 at $2.30 a share.
The company’s shares are now more than $160. The company had a 3-for-1 share split in October 2007, so in fact CSL shares are today the equivalent of $480 each.
That’s a return of more than 200 times the initial investment, not including dividends. Other companies which have done well long-term include Costa Group, A2 Milk and Blackmores.
3. Don’t listen to market “noise”
Don’t take too much notice, if any, of market noise. This includes rumours, investment blogs and trading community websites.
More often than not people who contribute to these are simply talking up their own books, generally about junior miners and penny dreadful stocks which they hold, hoping others will invest and prop up the share price or even allow them to exit the stock.
4. Do their due diligence before investing in a stock or a sector
There are many sectors to invest in, but which ones have the best long-term future? Technology? Healthcare? Finance?
Once you have picked your sector, the key things to look at when considering investment in a company are revenues, profits, dividends and stewardship/management.
What footprint does the company have in its sector? What is your first-cut exit price and stop-loss price? What are your expectations for your investment? Can a stock you are looking at really give you a 20% annual return?
A trusted financial adviser can give you great assistance with all these issues.
5. Pay attention to movements (both long term and short term) in interest rates and yield curves
The bond market is the world’s biggest investment market. It takes into account expectations for growth, inflation and interest rates, so ignore it at your peril.
The US two-year/ 10-year yield curve has flattened in recent months to 44 basis points, from around 80 basis points in late 2017.
Both US and Australian bond markets are expecting weak growth and inflation. When the two-year yield goes above the ten-year yield (known as “inverting”) a recession is more likely.
Another key factor here is the US budget deficit. Add Trump’s tax cuts and increases in spending, and the US budget deficit is likely to hit $1 trillion a year by 2020.
The US debt load is currently more than 100% of GDP. The last US President to make any meaningful impact on the US budget deficit was – believe it or not – Bill Clinton in the 1990s.
John Howard and Peter Costello deserve knighthoods for tackling Australia’s debt like they did.
6. Consider investing in overseas stocks
Australia represents 1.5% of world markets, so any balanced portfolio should include some level of exposure to overseas stocks – either individual stocks or via international funds.
Not only does exposure to overseas markets enable investors to benefit from market movements there, but it gives exposure to sectors that are small in Australia.
For instance the technology sector in Australia is tiny, but in the USA and elsewhere there are the likes of Google/Alphabet, Paypal, Ebay, Nvidia, Tencent and Alibaba Group.
Similarly, the international healthcare and pharmaceutical sector includes giants like Roche, GlaxoSmithKline, Express Scripts and Novo Nordisk. Global finance companies that Australian investors can only buy on overseas markets include Goldman Sachs and JP Morgan.
7. Manage risk, both with money and the market
Successful investors manage both money and risk.
They keep track of money going out and maintain a cash balance to meet all expenses. Risk management is equally important. What happens if markets turn south?
Highly-geared investors with long positions during the Twin Towers tragedy in 2001 or the 2008 market meltdown – when markets dropped by 60% – lost a lot of money.
8. Don’t get caught up in investment fads
Whether tulips in Holland or railways in the USA, investment booms have always, eventually, created havoc.
Fear of missing out is a big driver for many investors, but the reality is that the vast majority of fads end up not doing well.
Bitcoin is today’s fad. Bitcoin hit $US20,000 earlier this year and today is closer to $US8000. Needless to say Bitcoin is extremely volatile and anyone who has it as a major asset is taking an enormous risk.
9. Are mindful of changing economic factors
Every week there are economic indicators in major economies that have the potential to move markets and must be watched and analysed carefully.
The bond market looks at expectations for growth and inflation.
Other data in key economies like the USA and China are crucial, including employment data, retail sales, wages growth and industrial production. The numbers must be measured against trends and expectations, both of which have been built into asset prices.
10. Don’t discuss their portfolios at dinner parties and always keep their spouses informed of what they are doing
A good rule of thumb is to never discuss your investment portfolio with anyone who isn’t charging you for their advice.
Any advice these people give you is worthless and will likely be tainted by them talking up their own book.
For marital happiness, keep your spouse aware of what investment decisions you are making and the broad breakdown of your portfolio.