5 basic rules of successful investing in 2014 and beyond

Happy Wednesday… although perhaps not so happy for those of us, including me, who’d been hoping for a better showing from the ASX this morning. As of writing, after a promising start, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is trading flat on the day.

Stocks — THE place to be

Overnight, European and U.S. markets recorded their strongest rallies for the year, prompting John Lynch of Wells Fargo Private Bank to declare on Bloomberg

“Equities are the place to be.”

He’s not wrong, you know, despite the somewhat lack lustre start to 2014 for the S&P/ASX 200.

I mean to say, with the U.S. economy recovering strongly, combined with that country’s still ultra-low interest rates at least for the rest of this year, in to 2015, and possibly even in to 2016, where else are you going to get a decent return on your money?

The RBA chief Glenn Stevens has publicly stated his desire for a lower Aussie dollar. Apart from the jawboning he’s already done, the only other way to achieve his goal is to NOT raise our interest rates at least until the Fed raises U.S. interest rates… in 2015 or beyond.

Personally, especially given our economy is flat-lining at a time when the U.S. economy is recovering strongly, I can’t see our cash rate moving up from it’s current low of 2.5% for quite some time.

Down, down — interest rates going down?

Remember, it was only last month when Westpac’s Bill Evans retained and reiterated his call for the RBA to knock the cash rate down to 2.25%. It probably won’t happen at the RBA’s February meeting, but if Mr Stevens really wants to knock the Aussie dollar down a few more cents — into the 85 cents range — he’ll cut interest rates even further.

It’s not much fun for term deposit holders, watching their income fall, and fall, and fall…

But, it could be the rocket launcher the ASX desperately needs to send it rocketing towards Bell Potter’s Charlie Aitken’s target of 6,000.

I’m not one for making predictions, apart from saying this year, like every other year, there will be investing winners and investing losers.

I love winning. I loved watching the Australian cricket team pound England into submission. The one-sided nature of the contest made it even more enjoyable. For me, it’s all about winning.

The winning feeling… in 2014 and beyond

2013 was a great year for my portfolio and my SMSF. I’ve got the winning feeling, and am keen for my winning run to continue into 2014 and beyond.

I’m off to a good start in 2014. My position in Facebook (Nasdaq: FB) goes from strength to strength, the stock jumping 6% in the last two trading days.

I’m up over 550% on the Facebook call options I bought back in 2012, when the stock was hated, vilified and ignored.

This West Australian emerging oil producer is up 67% already…

On Christmas Eve I wondered aloud whether West Australian emerging oil producer Buru Energy (ASX: BRU) could be my portfolio’s big winner in 2014, and beyond.

In late June last year, I called Buru “My stock for ‘the next great resources boom‘.”

Imagine my delight yesterday when I read this in The Australian Financial Review

“Junior oil and gas company Buru Energy was the best-performing stock in the ASX 200, climbing 8.8 per cent to $1.98, as Brent crude oil rose to $US107.25 a barrel.”

Today Buru is on the up again, charging through the $2 mark, a very handy 67% gain from the $1.20 it was trading at when I featured it in these Motley Fool Take Stock pages in June 2013.

And then there’s Motley Fool Share Advisor stock recommendation, Sirtex Medical (ASX: SRX), its shares up an amazing 18% today after the biotechnology company released unexpectedly strong quarterly sales of its SIR-Spheres liver cancer treatment. The stock is now up around 113% since we first tipped it as a buy.

Not every stock is a winner… yet

Of course, not every stock I own, or indeed every stock on the Motley Fool Share Advisor scorecard is a winner.

In fact, I’m underwater on my most recent ASX purchase, a small company in the healthcare sector. I’m not bothered at all, knowing investing requires large doses of patience, particularly when it comes to investing in smaller companies. After all, Buru Energy shares were trading as low as $1.32 just over a month ago. Good things can come to those who wait.

2 key traits in successful investors

Motley Fool colleague Morgan Housel knows a bit about investing, and he reckons patience and temperament trump most things when it comes to being a winning investor. Below he lists his five basic rules of successful investing.

I admit, patience is not one of my strongest traits. But reading Morgan’s tips has reminded me just how important it is to remain calm, patient and invested, over the long-term, to generate serious wealth in the stock market. Enjoy, and prosper.

5 Basic Rules of Successful Investing

By Morgan Housel

Doing well in finance isn’t about memorising textbooks. It’s more about patience and an even temperament. That’s why people with no formal financial training can and do master investing.

Doctors might require a decade of school to become competent, but I’d say 90% of successful investing can be summed up with just a handful of simple rules.

I spent a lot of time in 2013 writing about simple finance rules. Here are five of my favourites.

1. Wealth takes time.

Charlie Munger, Warren Buffett’s investing partner, put it best: “You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.”

Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for seven decades.

Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His skill is investing, but his secret is time.

Understanding the value of time is the most important lesson in all of finance. The single best thing we can do to improve the financial state of Americans is encourage people to save from as early an age as possible.

2. Most financial problems are caused by debt.

I have a family friend who earned several hundred thousand dollars a year as a specialist in an advanced field. He went bankrupt a few years ago and will probably need to work for the rest of his life.

I know another who never earned more than $50,000 a year but retired comfortably on his own terms.

The only real difference between these two friends is that one used debt to live beyond his means while the other avoided it and accepted a realistic standard of living.

Just as saving gives you options in the future, debt takes options away. Not having the option of flexibility is the root of most financial problems.

You can be a brilliant worker (or investor) and find yourself in financial ruin if you don’t respect the power of debt. Income, wealth, and standard of living aren’t as correlated as people think.

3. Forecasting market returns is close to impossible. Worse, it’s dangerous.

A stock’s future returns will equal its dividend yield, plus its earnings growth, plus or minus changes in valuations (earnings multiples). That’s really all there is to it.

Dividends and earnings growth for many companies can be reasonably projected.

But what about the change in valuations? There’s no way we could possibly know that.

Stock market valuations reflect people’s feelings about the future, swinging between optimism and fear. And there’s just no way to know what people are going to think about the future in the future. How could you?

If someone said, “I think most people will be in a 9.26% better mood in the year 2024,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them investment gurus.

We know a group of high-quality companies will build wealth for their shareholders over time. But we can never be specific when trying to guess what the stock market might do going forward.

Assuming we can predict exactly what stocks will do in the future makes us blind to risk and uncertainty. Coming to terms with an unpredictable future forces us to be nimble and prepared. You can guess which group does better.

4. Simple can be better than smart.

Someone who bought a low-cost S&P 500 index fund in 2003 and left it alone earned a 97% return by the end of 2012. That’s great! And they could have spent the last 10 years at the beach, or hanging out with their kids.

Meanwhile, the average fancy professional U.S. market-neutral hedge fund — many of which are staffed with PhDs and some of the world’s fastest computers — lost 4.7% over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average U.S. stock-trading equity hedge fund produced a 96% total return — still short of a simple index fund.

There are no points awarded for difficulty in investing. Smart people who devote their entire lives to investing can (and often do) fail, while some of the simplest investing techniques you can think of are wildly successful.

Good businesses run by good people purchased at good prices held for as long as possible. That’s it.

That’s exactly the technique Scott Phillips and I employ at Motley Fool Share Advisor, our ASX-focused member-only stock-picking newsletter, and with good effect. Since inception in December 2011, the returns of the average Motley Fool Share Advisor ASX-recommended stock are soundly ahead of the All Ords.

5. The odds of experiencing stock market volatility are exactly 100%.

Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time there’s even a whiff of volatility in the stock market, the same cry is heard from investors around the world: “What the heck is going on?!”

The majority of the time, the honest and correct answer is the same: Nothing is going on. This is normal and just what stocks do.

Since 1900 the S&P 500 has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Volatility, even really severe swings, is perfectly normal and shouldn’t be feared.

Accepting market volatility as normal and focusing on the businesses I own is a lesson I’ve learned from many people, but particularly from my Motley Fool Share Advisor colleague Scott Phillips. Scott is one of the coolest and calmest investors I know.

His ability to remain steadfast in the face of market volatility is astounding. Amongst many others things, I know members of Motley Fool Share Advisor appreciate and value his cool head when volatility again returns to world stock markets.

One final tip for 2014, and beyond.

As we head into 2014, one of the best things you can do to improve your experience as an investor is remind yourself that investing may not be easy, but it’s not difficult or complicated.

Professional investors and pundits make it seem complicated because they think of it like medicine, complex and dependent on detailed knowledge. It’s not. This isn’t brain surgery. All we’re doing is spending less than we earn, saving the difference, investing it, and waiting.

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Of the companies mentioned above, Bruce Jackson has an interest in Facebook and Buru Energy

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