In 2015 investing icon Howard Marks wrote a memo called ‘It’s not easy’ featuring a great quote from Charlie Munger;
“It’s not supposed to be easy. Anyone who finds it easy is stupid”.
Right now investing seems especially not easy.
After years of low interest rates and strong share price growth, many quality ASX listed companies like CSL Limited (ASX: CSL) look expensive and many others are being exposed as a minefield of charlatans or opportunistic prospectors.
Others like growth stories Bellamy’s Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M) sit at one extreme. Shares in the two milk powder producers have multiplied 3.6x and 3.1x respectively in the last 12 months.
How I’m investing today
Perhaps it’s because I’ve been reading too many Howard Marks memos, but in my own investing I am still being cautious today.
One of my nagging concerns is that when interest rates start to rise there could be a wide re-rating of company valuations.
The process of intrinsic company valuation is built on risk-free interest rates and rising interest rates will require a higher return from shares. This return could come from higher earnings or lower share prices, but not all companies will be able to offset the change with higher earnings.
Far from selling and heading for the hills, there are three ways I’m exercising caution today:
1. I’m reading financial statements closely
This can actually be a tough ask if you don’t invest full time, but closely reading the financial statements should leave you with a clear picture of how a company is structured and how it generates cash.
There are so many investment red-flags that can be easily caught simply by reading the financial statements. If the company doesn’t feel right, be prepared to walk away.
2. I’m investing regularly
Rather than trying to time the market I am investing regularly to average out costs in my portfolio.
I do this through regular contributions to an investment account and by taking advantage of dividend reinvestment programs.
3. I’m paying down debt
Given my view that low interest rates won’t last forever I’m taking advantage of low rates today and funneling extra cash into paying off debt and building an iron clad personal balance sheet.
Reading financial statements and paying down debt are probably the least sexy ways to build huge wealth, but they will sow the seeds for significant compounding over time and let me build my position in the companies which will lead tomorrow.
We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.
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You can follow him on Twitter @Regan_Invests.
The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.