Successful investing broadly requires understanding two things – how to find great businesses at attractive prices, and how to manage your own thoughts, feelings and actions.
Both pursuits are long-term and never-ending in their nature – you never stop learning and new experiences shape your view. Even the great investors like Warren Buffett keep developing their skills and enlarging their circles of competence.
Never stop learning
Decades ago Buffett was focused almost solely on businesses which could be purchased for less than the value of their assets. Slowly, through reflection and learning, Buffett developed an appreciation for businesses which exhibited extraordinary earning power and with favourable economics – the likes of Coca-Cola (NYSE: KO) and his stable of insurance companies, respectively.
Most recently, after half a century studiously avoiding the technology sector, Buffett used those skills developed years earlier to recognise a tech titan which had the same attributes – a realisation which resulted in a multi-billion dollar purchase of IBM (NYSE: IBM) stock.
In the past few days, I’ve shared the names of four blue chip companies I believe are attractive candidates for inclusion in a share portfolio. They are solid, successful businesses, trading at reasonable to attractive valuations.
Invest in yourself
My larger aim – because I intend to build a portfolio to carry my family and I through retirement – is to make myself the best investor I can be. I want to make each new purchase decision better than the last – by being a ‘learning machine’.
So as much as I want to make some successful stock selections today, by far the more important aim is to be a better investor at the end of 2012 than I was at the end of 2011. If I can do that, I’m confident that over time, the rewards will come.
To help me achieve that aim, I’ve made these three New Year’s investing resolutions:
Spend more time living in the past
With many centuries of business successes and failures – and with them investment successes and failures – there is a rich history to learn from. It is said that those who fail to learn from history are doomed to repeat it, and I can’t disagree.
This year, I will devote some of my investment research time to understanding the history of economies, businesses and investment, to help me learn from the successes and mistakes of others. There are some wonderful books written by economic historians that are surprisingly good – interesting tales, well told – that can be quite instructive.
Read more widely
I am fascinated by the successes of investors, and we are fortunate that many have either written their own stories, or have had others tell them. The likes of Buffett, Peter Lynch, Philip Fisher and others have left a trove of insights that are only a click or a bookshop visit away.
Equally, the musings of some of the best and brightest are being shared with us in real time. In addition to Buffett’s semi-regular writings and media spots, the likes of Jeremy Siegel, Jason Zweig and the Fool’s own Gardner brothers are continually sharing their insights.
Lastly, I’m going to make a point of reading things I disagree with. There’s nothing like opposition to make you examine your own beliefs – and that process will hopefully help me clarify my own approach and keep my mind open to being corrected where I discover a better idea.
We’ve just been through a few years of losses in the major share indices. The silver lining on that particular cloud is that the waves of pessimism have washed away much of the premiums that were built in to the prices of some of our best blue chips.
I’ve taken the opportunity to buy more shares in some of those businesses over the past year or two, and I expect that in time, prices will recover to more ‘normal’ levels.
In that event, the opportunity for investors will be to look further down the list for opportunities – into mid-cap and small-cap territory. While this area often takes more work to get your head around – they’re usually smaller, lesser known companies and sometimes in niche businesses or industries – the opportunities can be significant if you can find businesses that are on the verge of greatness, under-appreciated, or both.
The luckiest investors are those for whom understanding business and investing is an enjoyable pursuit. Life is simply much easier when you’re doing something you enjoy.
If it’s not enjoyable yet, I encourage you to get into some of the writers I mentioned above – most of them write in easy to understand language that will open your eyes to the opportunities, and might even help you enjoy the pursuit.
Like getting fit or losing weight, becoming a better investor takes effort – but the rewards certainly make the endeavour worthwhile.
Don’t put it off – now is the time to make your investing resolutions for 2012.
Are you looking for more quality stock ideas? Motley Fool readers can click here to request a new free report titled The Motley Fool’s Top Stock For 2012.
Scott Phillips is The Motley Fool’s feature columnist. Scott owns shares in Coca-Cola. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson
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