In Why an investor must be courageous, we spoke about some of the daring bets of Sir John Templeton. Here is some advice that will surely make you a much smarter investor. His rules to follow if you want to be a successful investor.
Buy for the long term.
Do not trade or speculate.
The stock market is not a casino. If you move in and out of stocks every time they move a point or two, or if you continually sell short, or deal only in options, or trade in futures— the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
By trading frequently, you have to deal with capital gains tax and brokerage.
But buy-and-hold is not synonymous with buy-and-forget. Don't get complacent. No investment is forever.
What to do if you are caught on the wrong foot.
Sometimes you won't have sold when everyone else is buying, and you'll be caught in a market crash. There you are, facing a 15% loss in a single day. Maybe more. Don't rush to sell the next day. The time to sell is before the crash, not after.
Instead, study your portfolio. If you didn't own these stocks now, would you buy them after the market crash? Chances are you would. So, the only reason to sell them now is to buy other, more attractive stocks. If you can't find more attractive stocks, hold on to what you have.
There will be corrections and crashes. But, over time, studies indicate stocks do go up, and up, and up.
Work against the herd.
It may be obvious, but that isn't the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.
Yes, they tell you: "Buy low, sell high." But all too many of them bought high and sold low. Then you ask: "When will you buy the stock?" The usual answer: "Why, after analysts agree on a favourable outlook."
This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.
But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can't outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.
Quality has many dimensions.
Quality is reflected in different forms. It could be a company strongly entrenched as the sales leader in a growing market; a technological leader in a field that depends on technical innovation; a strong management team with a proven track record; a well-capitalised company that is among the first into a new market; or a well-known trusted brand for a high-profit-margin consumer product.
These attributes cannot be viewed in isolation. A company may be a low-cost producer but not a quality stock if its product line is falling out of favour with customers. Likewise, being the technological leader in a technological field means little without adequate capitalisation for expansion and marketing. Study companies to learn what makes them successful.
Determining quality in a stock is like reviewing a restaurant. You don't expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
Never invest on sentiment.
The company that gave you your first job or built the first car you ever owned may be a fine company. But that doesn’t mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.
Never invest solely on a tip. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
Templeton rightly said that ultimately, it is individual stocks that determine the market, not vice versa. While investors keep their focus on the market trend or economic outlook, individual stocks can rise in a bear market and fall in a bull market.
The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So, buy individual stocks, not the market trend or economic outlook.
Are you buying earnings or assets?
In most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks.
The earnings on stock market indexes—the fabled Dow Jones Industrials, for example—fluctuate around the replacement book value of the shares of the index. (That's the money it would take to replace the assets of the companies making up the index at today's costs.)
If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also.
If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets.
A portfolio must always be diversified—by asset class, by industry, by risk, and by country.
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars.
Then, also, what looked like such a well-managed company may turn out to have serious internal problems that weren't apparent when you bought the stock.
If you search worldwide, you will find more bargains—and possibly better bargains—than in any single nation.
Investment Involves Risk of Loss
