Self-help guru Stephen Covey died last month, aged 79. Author of The Seven Habits of Highly Effective People and other classic works, his books inspired millions.
But in the world of investment, 2011’s Free Capital by Guy Thomas perhaps comes closest to the genre. Based on interviews with 12 highly successful private investors it describes their investing styles, strategies and approaches.
But most of us, sad to say, aren’t (yet!) millionaires of that calibre, with million-dollar plus portfolios. And, as such, I reckon that the habits and investing styles that we need to cultivate are probably somewhat different.
For certainly, when I look at the private investors who I know socially, their focus is more on income, capital preservation and wealth-building through defensive blue chips — and rather less on searching for hidden value in unloved shares and the like.
So here’s my take on four really effective habits for the rest of us to work on.
The discipline of regularly putting money to one side and investing it does two things. First, it gets your money invested, and earning returns. No excuses; no “Things are a bit tight this month, I’ll do it next month…”. It’s done, and that’s that. Plus, of course, there’s the added benefit of dollar-cost averaging.
Better still, regular saving offers access to low-cost share purchase schemes, via those brokers offering £2 or £1.50 ‘dealing days’ each month, for instance. And for those of us who appreciate the merits of investment trusts, Baillie Gifford‘s popular trusts — including Scottish Mortgage Investment Trust (LSE: SMT), Scottish American Investment Company (LSE: SCAM), and Monks Investment Trust (LSE: MNKS) — are available entirely commission-free.
Stick to what you know
Over the years, I’ve seen countless people seduced by shares they knew nothing about. The discipline of investing only in businesses with well-understood business models may cause you to pass up on some stellar gains, but you’ll also duck a good-sized pack of dogs.
Warren Buffett has a variant of this rule — the ‘refrigerator test’, where he advocates buying shares with simple, easy-to-follow business models such as companies manufacturing consumer staples such as Coca-Cola (NYSE: KO.US). Peter Lynch had another: “Never invest in any idea you can’t illustrate with a crayon.”
On this basis, investors should look at easy-to-understand businesses such as Unilever (LSE: ULVR), Reckitt Benckiser (LSE: RB) and Diageo (LSE: DGE). Granted, all three are on P/Es that are higher than the FTSE average — especially Diageo — but they’re not going to go bust overnight, and the purchase yield will rise over time.
From the eye-watering spreads on thinly traded shares, to the trailing commissions paid by funds to investment advisers, the simple fact remains that high costs sap returns. Over the years, on both sides of the Atlantic, the Motley Fool has actively campaigned for low-cost investment products — the sort of exchange-traded funds (ETFs) funds offered by American fund giant Vanguard and our own HSBC (LSE: HSBA), for example.
Where to start? For a low-cost ETF tracking the FTSE 100 (UKX), take a look at the Vanguard FTSE 100 ETF (LSE: VUKE), on a total expense ratio (TER) of 0.10%. Or for the FTSE 250, there’s the HSBC FTSE 250 ETF (LSE: HMCX), on a TER of 0.35%. Fancy a dabble in America? Then go for the Vanguard S&P 500 ETF (LSE: VUSA), on a TER of 0.25%.
One difference between average private investors and some of the super-investors profiled in Free Capital is the extent of diversification built into their portfolios. Super-investors, in short, have made fewer, bigger bets — and have been fortunate enough to see those bets pay off.
Ignore investment fads
The dotcom boom, BRIC economies, oil shares, emerging markets, precipice bonds — I’ve seen every stock market mania since the Poseidon boom-and-bust of the 1960s. By not leaping on board, I’ve certainly missed out on potential gains, without a doubt. But I’ve also sidestepped potential losses, too.
This isn’t being contrarian, it’s just being sensible, in my view. Warren Buffett and Neil Woodford, for instance, both had ‘bad’ periods when their returns lagged others because they avoided dotcom mania. But being right, I reckon, is better than being ruined.
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A version of this article, written by Malcolm Wheatley, originally appeared on fool.co.uk