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5 investment lessons to always apply to your thinking

One of my favourite aspects to investing is that we can always learn more in some way. Perhaps learning about a new company or industry. Perhaps getting to grips with an announcement made by one of our holdings. Perhaps it’s reading about other investor’s teachings.

There’s no one right way to invest. But, if you keep an open ear and open mind to other investors’ lessons then you can fast-track your investing abilities and psychological strength.

Here are five lessons from Claudia Huntington, a 45-year investment veteran at Capital Group, shared on Livewire:

Management matters

She said that a so-so company run by a great CEO can turn into a good investment whilst a poor CEO can be damaging to a good company.

Whilst the whole crew is important to the operations of a ship, a bad captain can steer the ship into trouble or even cause it to sink.

It can be quite hard for regular investors to gauge management, but just pay attention to what they say, what their plans are for growth, any previous achievements they may have and the results delivered in each report.

Beware of too much debt

She said low interest rates have encouraged governments, businesses and households alike to accumulate high levels of debt. Rising interest rates will certainly be a headwind for the local and global economy in the coming years.

I am personally being very careful of companies that have high amounts of debt on the balance sheet which could become unmanageable in the next few years.

Don’t fear down markets

She said bear markets create much more attractive investment opportunities. Lower prices are a good thing to create stronger longer-term returns.

Whilst some companies are genuinely facing tougher times in recessions, many valuations fall simply because of investor fears. If you have the cash to deploy, that’s a great time to invest.

Be realistic when valuations are lofty

She said one of the longest bull markets in history (along with supportive central banks) have generated strong returns with low volatility.

The higher price you pay, the lower returns you can expect. That’s not to say some of the returns are genuine – the global economy has grown and so have earnings. However, when price/earnings ratios rise it gives investors less chance of strong returns in the future.

Embrace innovation

She said some of the higher valuations are justified with some technology companies abroad and at home delivering amazing revenue growth and disruptive business models.

As I’ve written before, that’s not to say these businesses are buys at any price, but high profit margins and long-term growth potential could make even today’s high valuation seem cheap in the years to come. Facebook, Alphabet (Google), Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO) could all be much bigger, more profitable businesses in 10 years from now.

Foolish takeaway

I like all of these lessons, particularly the points about debt and lofty valuations.

We all have worked hard to earn each dollar in our bank accounts and I want to make sure I’m allocating my money to quality companies with little chance of ‘blow-up’ risk of the actual business operations. Of course, valuations can rapidly change – but that’s part and parcel of the share market.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium and 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.