As you are probably aware many of us at Green Taylor Partners enjoy the philosophy of Scott Phillips, Chief Investment Officer of The Motley Fool. Scott can be read or heard regularly in Nine/Fairfax press, Money magazine, Weekend Sunrise on Channel 7 or on the Triple M – Motley Fool podcasts (which I highly recommend).
He recently re-released an article titled “Here’s How to Invest” to help his readers understand the investment approach they take, as well as the need to continue to refocus your approach to investing. Without fail, everyone will go through a bad experience when investing, so it is important to remain disciplined to ensure you continue to invest to improve your life.
I have summarised his article below in 6 points:
1. We’re standing on the shoulders of giants
There is nothing new in investing, the principles have remained the same over the last century. There are no “magic formulas” or “black boxes”. Don’t be tempted by get rich quick offers or silly promises. Their philosophy is to learn from others, carefully choose stocks and focus on increasing your financial education. Remain disciplined.
2. Expect volatility
The stock market has a year of negative returns about once every 3 years. Big falls will happen (eg, Global Financial Crisis, the “dot com” crash, 1987 “Black Monday” plunge).
If you look at a graph of any long term market index chart you will see all of these big falls, but you will also see the graph continue to move “up and to the right” and over time the falls diminish relative to time. The price of avoiding volatility can be a very dear price!
3. Know the odds
A quote from well know US Fund Manager Peter Lynch is “in this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten”. In other words, you’ll be wrong 40% of the time (and that’s if you’re good!)
If you (or your adviser) pick the right companies though, you will be compensated significantly for the ones you get wrong.
4. You should be diversified
If you only buy one recommended share, it can sometimes be a coin toss as to whether you win or lose. If you only toss it once, it will either 100% heads or 100% tails. Toss it three times and your chances of heads are 33%, 67% or 100%. The more you toss the coin the closer your likely result will be to 50%.
Be diversified. Get to 15-20 holdings reasonably quickly.
5. Be a long-term investor
Chart readers and short-term traders face an extremely difficult task trying to make money, with lower odds of success.
In the majority of cases it can take time for a company’s full (or correct) value to be realised by the market. You might identify an excellent company which is being shunned by the market. It’s share price may continue to drift lower but eventually the market will get it right.
Also, the power of compounding returns (the 8th wonder of the world!) will also see the value of your portfolio snowball over time!
6. Work on your temperament
The first five points are all great in theory, however executing the above and living through the ups and downs of a market can be tough work (I think Mike Tyson once said everybody has a plan until they get punched in the mouth!).
It is hard to hold on in the face of another market crash and the temptation is to sell out at what can eventually be the wrong time. You will always end up with battle scars, but hopefully a little wiser and definitely financially better off.
The important thing is to start investing, as soon as possible.