COLIN MACLEANTo be a successful investor in the stock market, there are a number of factors to be taken into account. The list below is not exhaustive, but it does at least give some sensible views to consider before parting with your hard-earned capital.
COLIN MACLEAN
To be a successful investor in the stock market, there are a number of factors to be taken into account. The list below is not exhaustive, but it does at least give some sensible views to consider before parting with your hard-earned capital.
Many of them have been said before by Charlie Munger, the partner of Warren Buffet, the legendary investor.
1. RISK In the good times, investors tend to conveniently ignore risk and concentrate on returns. The downside of an investment should also be evaluated as well as the potential upside. Capital has to be protected as much as possible. For example, it is arguable whether the risk of inflation (brought on by the government printing money) is being priced into gilts.
2. CONTRARIAN You very rarely make money in the long term by following the herd. To go against the crowd is very difficult to do from an emotional point of view but it can pay handsomely in the long term.
3. PATIENCE Is a virtue in investment like most things in life. It is difficult to understand why investors feel the need to churn their portfolios. Do the homework, buy the stock, monitor business performance and the share price will follow.
4 . INDEPENDENCE Do not listen to the "noise" in the stockmarket and be sucked in to the "trend is your friend". Read widely (especially the annual report & accounts), listen to seasoned business and investment professionals and come to your own conclusions. Buy and sell recommendations from the analyst community are not independent views no matter what they say.
5. ANALYSIS There is absolutely no substitute for rigorous analysis prior to any investment. Your starting point should be the company's annual report and accounts - and please begin from the back of the report.
6. ALLOCATE The allocation of capital is crucial and capital should flow to the businesses who use it wisely. It never fails to amaze me that heavily-indebted businesses who have wasted capital can succeed in raising more money from investors to pay off banks and buy back debt. Good businesses throw off cash and it is wonderful to be invested in such companies as they invariably reinvest the capital to make even more cash for shareholders.
7. DECIDE Once the analysis has been completed and the opportunity presents itself, be decisive and back your judgment with conviction.
8. HUMILITY You don't know everything and you never will. Admit it.
9. PREPARE Fail to plan - plan to fail. List all your assets and liabilities and plan your investment strategy accordingly. Decide what you are trying to achieve from your investments and over what timescale.
10. KISS Keep it simple. When you analyse a company, the products it manufactures and sells is irrelevant. What is comes down to is can they make it, can they sell it and can they finance it, while at the same time throwing off more cash than was originally consumed.
Jim Fisher is managing director of Saracen Fund Managers
