It’s a long, hard road to building wealth.
When you start investing you always have a destination in mind, but no one gives you a map to get there and it can be incredibly hard to figure out which direction to set off in.
My approach is to stick to some basic principles to guide my investing decisions.
I want my money to work as hard as possible, but I also need a way to choose between the range of ASX listed companies like CSL Limited (ASX: CSL) and Telstra Corporation Ltd (ASX: TLS) and to guide me on when should I sell or buy more. It’s not easy.
My principles have become a valuable foundation for how I think about investing in businesses. They also act as an effective sentry to prevent emotionally charged decisions when I’m feeling greedy or fearful.
There are four easy principles I follow for investing:
1. “Make your portfolio reflect your best vision for our future”
I have adopted this quote from Motley Fool co-founder David Gardener. This is another way of saying ‘invest where the puck is going’ and means focusing on owning companies that fit your view of where we will be in 3, 5 or 10 years’ time.
Cloud business platform Xero Limited (ASX:XRO) is one example of a business I see as having the long-term potential to enhance the way small businesses operate around the world.
2. Only buy businesses you understand
It sounds dumb because it is so obvious, but you need to really understand the business to know if the people running the company are doing a great job or taking on too much risk.
3. Own companies with advantages which drive above-average returns
A company with sustainable competitive advantages can win business from competitors, can dominate its market and can produce above-average returns for its owners.
4. “Compound your face off!”
In my view compounding is the secret to building a fat, cash-generating portfolio over time, so I love this aggressive quote by author and Portfolio Manager Wes Gray.
It reminds me to reinvest any dividends, maintain long-term focus and not to jump in and out of the market.
It will take time to narrow down the principles that work best for you, but you can speed up the process by reading widely. This will quickly identify the types of companies and investors you can closely relate to to help build your principles.
For example, if your view is that the world is rapidly changing, you might want to dig deeper into these three revolutionary Aussie companies.
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.
That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.
We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!
You can follow him on Twitter @Regan_Invests.
The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Xero. 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.