At a special Members-Only event held in Brisbane recently, attendees were fortunate enough to hear directly from The Motley Fool co-founder and CEO, Tom Gardner, who shared his wisdom from decades of investing in the US markets.
Tom’s key message for both new and experienced investors can be summarised as the 6 golden rules of investing:
Investing is a life-long endeavour
Particular investments in your portfolio may come and go over time, but when investments in your portfolio are sold, the process of investing should nevertheless continue.
Whatever you do, don’t spend the proceeds. Instead ensure that any cash received is suitably kept aside for future investment and plan to continually invest.
In doing so, you’ll increase the probability of growing your wealth faster than the effects of inflation.
Own 20-40+ share positions (diversification)
This sounds like an enormous number, but the goal of 20 to 40 positions actually paints a picture of where your portfolio should be some time in the future.
With a regular savings plan in place, you can slowly build enough capital to consider future purchases in new and different companies. Add to this the regular dividends that you’ll collect along the way, and you’ll be in a solid position to add positions to your portfolio over time.
Increasing the number of companies in your portfolio to between 20 and 40 is a sensible balance between risk and reward. If one, or even two, companies fail miserably, they won’t wipe you out financially.
High-quality starting candidates for a well-diversified long-term portfolio include Cochlear Limited (ASX: COH), Transurban Group (ASX: TCL), and Washington H Soul Pattinson & Company Ltd (ASX: SOL). All are proven performers over many years.
With a little research on your part, you’ll find that there are many other quality companies that you can consider buying into with a view to creating a rock-solid diversified portfolio.
Know, and accept, what your odds of winning will be
Don’t ever, ever, consider that every investment you make will be a winner. This is lower case ‘f’ foolish.
If you can make 6 lucrative investments out of every 10, over any time period greater than 3 to 5 years, then you can humbly consider yourself successful.
By having realistic expectations for what real investing entails, you’ll avoid investors’ regret.
Accept the reality that not everything will work out for you and you’ve gone someway to developing the correct temperament for an investor.
Have a 3 to 5-year average holding period … at least
It takes time to build a portfolio but it also takes time for the economics of truly profitable companies to shine through in your portfolio.
Allowing your companies time to invest and grow is one of the surest ways of benefiting from their economic success, especially those companies that exhibit strong pricing power.
By buying shares, you’re effectively hiring the company’s management team and staff for the period of your ownership. Show patience and let them add value for your company’s clients. Rising earnings per share over at least 3 to 5 years will mean the short-termism of the share market will have less of an effect on your portfolio as the business fundamentals win out.
Expect 20% to 30% declines in your portfolio at least twice every decade
Acknowledge the reality of share markets.
Investment charts don’t rise 45 degrees left to right in a straight line, just because you want them to.
As Morgan Housel, columnist for The Motley Fool, puts it so succinctly: volatility is the entry-price to higher returns.
You can’t invest and gladly accept such higher returns without giving something up in return.
Just understanding and accepting the risks of major (paper) losses twice a decade on average means you’ll be able to prepare for, and possibly take advantage of, such price movements when they occur. Whatever you do though, don’t sell when everyone else is, that’s simply a disaster-in-waiting.
Have no position greater than 15% of your total portfolio
Even starting with $2,000 and building it up slowly to $10,000 over a few years, it’s likely that your positions could initially be anywhere from 20% to 50% of your portfolio.
Given that investing is a life-long endeavour and that it will take time to build a portfolio of 20 to 40 positions, 15% or less should be your target as you save and invest during your life.
Of course, if you know your businesses well, then it may be that having 20% or even 30% in one position will suit you perfectly, but the risks to your financial well-being are undoubtedly higher.
Accept that you don’t know everything and that things happen.
New, unforeseen technologies that allow competitors to steal away your company’s clients, fraud committed by senior management adversely affecting the sustainability of your business, regulatory changes affecting the dynamics of the industry your company operates in, and maybe even the weather. All of these examples, and many other variables, can impact the companies that you own.
At least by limiting your individual positions to no more than 15%, you can somewhat control the amount of damage that could occur from unforeseen events.
Get a family member involved
Okay, so you understand all of the above and you consider yourself a successful long-term investor.
What about your spouse, your parents or your kids?
Get them engaged and make investing interesting, relevant and fun.
Investing doesn’t have to be a boring staid process of ‘talking about money’.
In reality, it’s all about participating positively in the economic ecosystem that surrounds us in a modern first-world industrialised country. When you’re buying a stake in a company, you’re buying a piece of the infrastructure that has helped to create what Australia looks like today.
Bring your kids into a Smiggle store to buy books, bags and pencil cases for school and at the same time smile knowing you’re supporting your holding in Premier Investments Limited (ASX: PMV).
If the in-laws are visiting, suggest to them to pop into a Brumby’s bakery to buy some lamingtons or vanilla slice on the way over. Let them know you have shares in Retail Food Group Limited (ASX: RFG) and then thank them for buying from one of your businesses.
Do you hate toll-roads? Every time you hear the ‘beep’ as you drive through a Transurban Group (ASX: TCL) tunnel, at least feel somewhat satisfied that you’re ultimately paying yourself.
What Tom’s 6 golden rules of investing provide is a framework for successful investment. It’s by no means the only framework out there, but the rules above are proven as a basis for life-long investing and, if followed, you’ll have every chance of not sabotaging your financial future.