American investment writer Jason Zweig once observed: “My job is to write the exact same thing between 50 and 100 times a year, in such a way that neither my editors nor my readers will ever think I am repeating myself”.
He explains that while stock markets and the general investment environment are always in a state of flux, good advice about investing rarely changes. And good advice, as Zweig’s many admirers acknowledge, is a commodity that he liberally dispenses.
And yet there’s a very significant grain of truth in those words. In the 30 or so years that I’ve been investing, good investing advice today is much the same as good investing advice back then.
Consider this: As investors, we’re always faced with things that we’re supposed to worry about and are always given reasons for avoiding particular companies and sectors.
Yet over the long term, London’s FTSE 100 index largely shrugs off such concerns. It’s up over 550 per cent since it was launched 30 years ago, back in 1984 – an annual growth rate of almost seven per cent. And that’s ignoring dividends, which add to those returns of course. Throw in an extra, say, 2.5 per cent a year for dividends and on a total return basis, the FTSE’s performance is probably above nine per cent.
So how can you capture those same returns yourself, over the next 30 or so years? It’s a good question, but to my mind, not quite the right question.
A better way to look at it, to my mind, is to step back and think about why the FTSE 100 climbs over time.
That’s because the companies that make up the FTSE prosper and grow their profits each year, with those increased profits driving up the value of those companies, as their dividends and earnings increase.
So the way I see it, a better question to ask is, “How can I build a stake in the FTSE 100 companies which are set to deliver growth?”
And here, we’re right back to Jason Zweig’s words of wisdom, because the basic principles of identifying those companies form the bedrock of successful long-term investing.
Strategy 1: Buy good businesses. Isn’t that a bit obvious?
Maybe, but there are plenty of bad businesses out there – businesses with high debts, huge unfunded pension obligations, out-of-date business models, poor managements, low profit margins, declining sales, and plenty of other reasons for keeping your hands firmly in your pockets.
Yet at the same time, there are also plenty of good businesses. And with so many sound, solid businesses to choose from, why take a risk with businesses that are sub-par?
Look for quality, in short. And keep your hands in your pockets until you find it.
Strategy 2: Buy them when they’re cheap. I’m not now going to trot out the words of Warren Buffett and Baron Rothschild about being greedy when others are fearful, and buying when there’s blood in the streets.
It’s good advice, but you might have to wait a decade or more.
But relative cheapness is quite another thing. And plenty of businesses experience periods when they fall out of favour with the market, with their prices falling by 10 per cent, 20 per cent, 30 per cent or more relative to the broader index.
Just look at businesses exposed to the present downturn in mining and oil, for instance: BHP Billiton is down 21 per cent against the FTSE 100 so far this year. BP is down 13 per cent. Fenner is down 52 per cent. And so on.
It’s a malaise that’s cast a pall over many businesses and, in the process, thrown up bargains.
Not all those businesses are good, solid, quality businesses, of course. But some are. And now, they’re cheap.
Strategy 3: Buy good businesses. Again and again, academic studies show that frequent trading – buying shares and quickly selling them – leads to inferior returns. Why? One important reason is the additional trading costs, of course. But just as importantly, selling not only crystallises any losses, but poses the question: where to invest next?
The way I look at it, if I’ve bought a good business, and I’ve bought it at a good price, why would I want to sell? Shares have their ups and downs, so why not just ride them out? Holding for the long term isn’t very exciting, but there’s no doubt that it can reward patient investors.
So that’s three sure-fire strategies to target investing success in 2015 and beyond.
But here’s something else to think about.
Is it the first time that you’ve read such advice? Probably not.
And is it the first time that I’ve written such advice? Most definitely not.
Because, as Jason Zweig observes, good advice rarely changes.
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