Investing Pearls of Wisdom

Investing Pearls of Wisdom

Timely investment advice that is sure to produce returns for any investor. Moral of the story: Don't speculate!

Long-term conservative investors know that to profit from the stock market there are certain caveats that need to be adhered. Benjamin Graham, the father of value investing, wrote, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”.
With that perspective here are some timely investing rules that separate investors in the market from speculators, or those who build wealth over time to those who watch prices.
  • Investing is what makes you rich, not speculating. 
  • Investment is the long-term ownership of a business that is gradually increasing its intrinsic value through providing goods and services that customers actually want. 
  • Speculation is buying and selling pieces of paper based on forecasts of the price movement on those pieces of paper, based on sentiment. 
  • Risk is not volatility; it's the permanent loss of capital. Bernard Madoff's fund had no volatility until it became worthless. 
  • The market is not an accurate reflection of value. For example, a company may have 300-million shares in issue and 200 000 trade each day. The price may trade all day between $R11 and $11.50 but at the close, a trade of 100 shares at $12 determines the price for all 300-million shares. You don't know why people are buying or selling or what's driving their decisions. It could be to pay off debt or to rebalance a fund. Maybe only two investors traded the whole day. You need to work out the value yourself. 
  • The most important decision is to buy at the right price; then you can ignore the market noise. Spend your time working out the right buying price. 
  • Hold on to quality shares and never sell unless you have made a mistake (and assuming you successfully employed the last point). 
  • Quality of earnings is critical. Look for companies that will deliver robust earnings into the future. These companies have pricing power in their industry. Robust companies make money from the volumes of trade in their business, not cost cutting. 
  • Quality of management is also critical; they must be trustworthy and able to manage risk while taking advantage of opportunities. 
  • Watch interest rates and dividends. Asset classes compete for capital so when interest rates are low money will go to other investments offering better returns and vice-versa. 
  • Compounding is the key to financial success. You need time in the market and patience. 
  • Returns over the last ten years have been above trend; adjust your expectations for future returns. 
  • Watch costs, these erode your returns. Trading increases the costs of investing. 
  • Buy companies you would be happy to hold for ten years should the market close tomorrow. 
  • A bird in the hand is worth two in the bush. Buy when the price is right and don’t wait for better opportunities that may or may not emerge in the future. 
  • Do not allow cash to burn a hole in your pocket. Not buying or selling is as equal a decision as buying or selling. 
  • Pay no attention to short-term market forecasts. Do your own research. You are right not because other people think you are right; you are right because your reasoning is right.

These caveats, while universally known in the value investing world, are based on an article in the Mail & Guardian.

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