There are many ways up a mountain, as the saying goes. Becoming a successful investor can feel like climbing Everest, but here are some tips from the experts.
ONLY BUY GOOD COMPANIES
That may sound obvious, but actually a lot of investors do the opposite. They invest in down and out companies on the hope of a turnaround, or “because a stock broker bought them lunch,” says Terry Smith of the hugely successful FundSmith fund.
He says the marker of a good company is one which makes a high return on the capital it has invested over a business cycle. Smith's not the first one to say this – it is also the philosophy of Warren Buffett, considered one of the most successful investors the world has ever seen. “Since Buffett said that it has been almost universally ignored,” Smith adds.
Companies which fit the bill and that Smith has invested in through his fund include: computer firm Microsoft, healthcare company Johnson & Johnson, drinks maker Dr Pepper Snapple and tobacco giant Philip Morris International.
INVEST IN DOMINANT BRANDS
Many investors like to support small, innovative companies with great ideas that have the potential to change society. It’s one reason investing through crowdfunding has become so popular.
The big problem with this approach is, when a new idea or product emerges, other businesses will immediately jump on it and try to steal market share from the innovator.
It’s essential to invest in companies which can defend themselves. “There will be new entrants to a market. The companies that can defend themselves have a combination of strong brands and control of their distribution networks,” Smith says. The stocks above are good examples of this.
“Not turning over your portfolio helps to remove costs,” Smith says. This is also an argument for investing directly in shares, rather than choosing fund managers to buy shares for you. Alongside paying an on-going charge listed on the fact sheet, known as the OCF, there will also be extra costs for every time the fund manager buys and sells stocks.
“The hidden costs of transaction are not revealed in fund managers’ OCF,” Smith says. “When I sell out of shares in a company, I do it with fear and trepidation because they almost always go on to do well,” says Smith.
Smith puts it quite prosaically: “Get the hell out of the way and let the shares perform.”
“The key to successful investing is not only to capture the gains on the upside, but also to minimise the falls,” says Alastair Irvine of Jupiter Asset Management.
Trading around the highs and lows seems the most logical way to do this. The trouble is, spotting when shares are at their peak is notoriously difficult. It’s better to just stay invested in a company you’ve chosen through the ups and downs. “You need to be patient.
Running a portfolio like a demented bluebottle isn’t really a winning formula,” Irvine adds.