Investment advice from the masters

Common sense, patience and fortitude to not follow the crowd are characteristics of some of the greatest investors

“Ultimately it is not the stock market or even the companies themselves that determine an investor’s fate. It’s the investor.” Peter Lynch, stock market legend and fund manager who took Fidelity Magellan from $22 million in assets to $14 billion in little more than a decade.

There’s no secret to being a successful investor. Common sense, patience and fortitude to not follow the crowd are shared characteristics of some of the greatest investors of the 20th century. There is a surprising consensus among them, and an even more surprising simplicity in what they have to say.

As Peter Lynch says: “Invest in what you know.”

Lynch is a firm believer in investors using their own “local” knowledge and common sense to alert them to potential investment opportunities. The average investor through his job, hobbies or personal interests is often in a good position to spot potential or emerging investment opportunities. At a deeper level, common sense means knowing why something is a good investment.

Quite simply, says the “Oracle of Omaha” and Berkshire Hathaway’s Warren Buffett: “I don’t buy a business I don’t understand.”

If any investment’s advantages and disadvantages cannot be easily and plainly explained, it may not be an investment at all, just a speculative leap of faith.

“The investor should act consistently as an investor and not a speculator,” says the father of modern security analysis, Benjamin Graham.

He pioneered the quest for under-valued stocks and bonds by using a company’s published financial statements and market performance to find hidden value. Low historic price/earnings multiples, a company’s intrinsic “book” value relative to its current stock price and a healthy and consistent dividend track record can all be signs of hidden value. Graham’s finest student, Warren Buffett, says “I’d sooner buy a great business at a fair price that a fair business at a great price.” Bargains are great, but they’re not the same thing as good value.

Sir John Templeton, the founder of the Templeton Growth Fund once said: “Forty years of experience have taught me you can make money without ever knowing which way the market is going.”

Peter Lynch is of a similar mind: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” The daily volatility of recent markets reveals more about investor psychology than it does about the long-term value of your investment portfolio. Templeton, a contrarian by nature, considered daily media analysis and market volatility as noise that could safely be ignored.

Bernard Baruch, a renowned American statesman and speculator, once advised: “If your stocks are keeping you awake at night worrying about them, you should sell to a sleeping point.”

Know your risk tolerance and buy and sell accordingly. Investors often think they are supposed to be risk takers, but in fact, successful investing is a function of risk minimizing and looking for what Benjamin Graham called, “a margin of safety” in their investments. Informed speculation may have its place in a portfolio, but not to the point of sleepless nights.

As Benjamin Graham once said: “Investment is most intelligent when it is most business-like.”

Many investors make their portfolio management an emotional experience. That’s not the way of the masters. Know what you’re buying says Warren Buffett and why you’re buying it. And just as important, know when to sell. Ben Graham firmly believed that, “the investor should have a definite selling policy,” that is, a pre-identified price point when to take a profit or loss or a pre-established maximum holding period for each investment.

These investors were passionate about the stock market and the companies they invested in, but they remained coolly professional about how they managed themselves and their investment decision-making.

 

 

Judy Poole is a financial advisor with Raymond James, and has spent the last 39 years involved in the financial industry. You can reach her at judy.poole@raymondjames.ca or see her website at  www.raymondjames.ca/judypoole. This article is provided as a general source of information and should not be considered personal investment advice.

The views expressed are those of the author and not necessarily those of Raymond James Ltd. Raymond James does not endorse and is not responsible for the content of external sites.

 

 

 

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