The following is broadly my end answer to a question not asked. In that this is what I think new investors need to consider before they try to get into the specific actions of an investing style.
1 - Know Yourself.
There are literally dozens of ways to be a successful investor or trader. Ranging from macro to micro, day trading to long term buy and hold.
Most investors and even many traders operate some form of a blend rather than a pure following of any one approach. For instance Walter Schloss, one of the great value investors, would on occasion buy a position based on a screen for low price, before doing the research on whether to keep the position or increase its size. He also contrary to his friend Warren Buffet would hold up to 200 positions rather than a focussed few.
Sir John Templeton, another great value investor, made his fortune by buying 100 shares of every company trading under $1 on the NYSE at the start of WW2. This was not a value bottom up approach.
But whilst many run a blend from a pure strategy, very few succeed by moving from style to style. They have their approach and they follow it.
This sticking to your knitting was shown when Seth Klarman interviewed Ray Dalio. Seth Klarman is author of the book “Margin of Safety” and is one of the legendary “Value” investors and runs the Baupost fund. Ray Dalio, another legend, but of the “macro/growth” style, runs Bridgewater. At one stage Klarman asked Dalio for some value suggestions and Dalio’s response was, (I paraphrase), that he couldn’t give any because that just wasn’t the way he thought. He did not look for Value (mispriced) but Opportunity (would with changes in the world become worth more).
As such the key factor I think for anyone getting into trading or investing is to try and understand what approach makes sense for them, and most importantly, they can be happy operating. Investing is easy to do, but hard to succeed at. As such the last thing people need is to be fighting against their nature and natural outlook. You need to be able to sleep at night. Never forget that IG has to advertise that almost 80% of the people on the platform lose money.
2 - Be honest both about your knowledge and your time
Do try to not fool yourself about what you know, or the time your system will take. If you cannot read a balance sheet or a P&L you are going to struggle to be a Value Investor. If you want to trade on minute candles you are going to struggle if you are working a 9-5 job.
Every system requires a body of knowledge, a certain level of time to utilise that knowledge and the mental fortitude required of that particular system. If you don’t have the time you can’t operate the system.
A friend of mine is an author and world class fisherman. He used to invest in equities. But now he is retired he doesn’t have the time. Jetting round the world, standing by rivers and sitting on boats means that he has reduced his activity to a quarterly review to assess the circa 12 funds or ETF’s that he has his money in. He has a couple of days a year for investing, not a couple of days a week.
There is nothing wrong with his approach, it works for him and it fits his lifestyle. Could he improve his returns by spending more time, perhaps, but the time would seriously detract from the enjoyment he now has.
So be honest about what you know and how much time you can or want to afford.
3 - Learn how to manage risk - in your approach.
Different approaches require different risk management approaches. As a long, value orientated investor two I use are Margin of Safety, (making sure that what you buy is worth noticeably more than you are paying for it) and Sizing, (never putting in an initial investment that would break me if I am wrong). I know a few traders and they often work on risking only 1% of their portfolio in a trade. It allows them to make a significant level of mistakes and still keep trading.
Managing risk is absolutely vital. If you are not clear in your own mind how you are explicitly going to do this within your style then I would question whether you should be investing.
As a subset of Risk Management I would specifically say that liquidity and margin are terms that you should properly understand and plan for. Whether you see cash as wasted money sitting on the sidelines that should be invested, or optionality both for the future opportunities and to manage current risk in the portfolio is up to you. But to not be clear on this for yourself and how you will manage this is one of the surest ways to end up losing money that you cannot afford to lose.
4 - Invest in Yourself
There is little you can do that will reap a greater reward than spend time, effort and even money improving your skill base. Provided you have properly answered the first two points.
There is little point in me spending a lot of time learning to be a better currency trader as I don’t trade currencies. But with the caveat of relevance to your style, I cannot think of any time where I have looked to improve my knowledge and skill, that it has not repaid my effort and cost many fold.
5 - Don’t Compare yourself to Others, but do have a benchmark.
In my opinion quite a few people are disingenuous about their returns.
Some do it because that is their nature, to boast and overclaim about their successes and to hide their failures. Some do it as they want to believe they are better than they are. Many of the loudest do it because they are trying to sell you something, either directly or by monetising you as a subscriber. Who would buy advice from someone who cannot do any better than they are already doing?
This is not to say that just because someone is selling you something they will inherently not be clear about their returns. It just recognises that people do have implicit and explicit motivations.
Also much of the reporting is irrelevant. I can double my money each year - bet on red. Works every year until it doesn’t. So big returns may not mean great processes.
More importantly, are you in the risk stage, the growth stage, or the retirement stage? Nobody else has your risk profile, your starting point, your aspirations, your immediate needs, or your family. So nobody is sensible as your comparator.
In contrast to the point before I do believe everyone should have a benchmark. Be it the S&P or a fund or ETF that you could have placed your money with. It gives you an indication as to what you could be doing. So if you are not very good you know what to do. Give it to the experts. Or live with the performance. I have one friend who largely does Investment trusts. But keeps 10% for direct investment. Knowing he has a unique style, but loving the attempt to do better and the knowledge he is growing.
Also whilst many individuals do enhance their reported returns the big benchmarks are calculated by third parties and scrutinised. They are broadly genuine and achievable.
6 - Think of it as a Single Portfolio
Your money is your money. £1 in your pocket is as good as £1 in your wallet.
I think those that think about different portfolios are potentially making a big mistake. It allows all sorts of biases to come in. Pessimists will focus on the portfolios doing badly, optimists on the portfolios doing well. Both may misjudge their overall performance.
In reality only a small number of investments will deliver the bulk of returns, by splitting things into small pots there are all sorts of ways you can be mistaken in where you focus. You do not retire on your income portfolio or your ISA or SIPP portfolio. You retire on all your money, in all your accounts.
The addition to this is the person who makes big returns each year but never grows the pot. Say you have £500,000 and make 20% which you then take out and spend (second hand Ferrari). Next year you make 10%. (Family trip to Dubai). Etc, etc. After 2 years you have the same amount. Beaten by the person who only does 5% but can afford to keep it in the portfolio as he doesn’t fool himself with multiple pots.
7 - Know when and why to sell
Depending on the style you operate there should always be a point of sale. This can be very clear, as in if X or Y happens I sell (eg price gets to £1.40) or it can be more nuanced.
Just as examples many deep value investors will sell when they see the share price within 10% of their estimate of fair value (Seth Klarman- “Always leave a little for the next guy”). Others like famed growth investor Shad Rowe will hold whilst they see the management as above average and the opportunity as substantive, but should either of these change they sell. Clearly with charting there are all sports of sell indicators, (that need to be understood if that is your style), and acted upon.
8 - Use shortcuts
In most styles of investing you can use shortcuts. What shortcuts you use do depend on the style of investing you conduct.
As a value orientated investor I use a few different ones.
I run screens looking for companies to look at. Screening is a shortcut in itself. But I shortcut the shortcut as many of my screens are simply applications of concepts that the great investors have already come up with. I have Schloss screen, a Greenblattt screen, etc, etc.
I also have found 8 fund managers I think are very good and value orientated. I look at their monthly factsheets to see what they are buying, or big existing positions. This provides a starting point to do my own research.
Once you know your style, look for your shortcuts. Nobody needs to reinvent the wheel.
9 - Time affects returns, allows compounding and is one of the last great bastions of the private investor
Time and Compounding are often described as one of the world’s great wonders. And rightly so.
There are loads of charts demonstrating that starting early even from a low base and compounding will reward you far more than starting later even if you put in substantially more money each year. If you are wondering, get out excel and try it for yourself. It is important to realise that as an investor time and compounding apply to your investments,
The longer you can be in the game, the longer you have to succeed. Amazon fell 70% 6 times or more. But the investors who could stay in Amazon have reaped rewards past most of their expectations.
Historically time builds winners. If earnings compound at a bit over 14% you double earnings every 5 years.
Time in the game, and the ability to stay in the game can deliver you fantastic rewards from doing not a lot.
Time in the game is not allowed to most professional investors. They invariably have a reporting cycle. Perhaps weekly, perhaps daily. If they fail to deliver for too many cycles they are out.
They also do not maximise their return by maximising the funds returns. They maximise their return by growing Assets Under Management. As such the story used to sell the fund is at least as important as the actual result. One of the realities of professional investors is that they will buy and sell shares at period ends not because they see them as bad or good shares but because they do or do not want to include them in the next set of marketing blurb that they will be using to increase the AUM. As a private investor you can hold, avoid the trading costs and not need to worry about what the marketing department needs this week.
10-You will make mistakes, you never have all the facts.
A lot of investors write about their successes. They often write as though given their thinking and research the success was obvious. It almost always isn’t that clear cut until after the event. To the extent that anyone knows what is happening in a company it is not the investor, but the management. But time and again we are shown situations where managers have no real idea what is happening. Barings, BP, Northern Rock, anyone who lent to Archegos. Every airline before Covid arrived.
Yes you can and should do a level of work. Commiserate with both your style and time. But nobody ever knows everything or makes no mistakes. Though I am always impressed by the number of people who can point out that X was obviously a bad idea only days after it went down. If only they would tell me before.
11-Tax optimisation
I do not believe the tax dog should wag the investment tail. But everyone should, before they start, know about the relevant tax structures and how to avoid tax.
Properly using ISA’s and Pensions can make even the most average of investors tens of thousands of pounds. I do not propose to go into a review of the tax vehicles that we are allowed, even encouraged, to use but as an example if I put money into a pension I get HMRC to add at least 20%. There are few investors that can deliver a guaranteed 20% in a year. And that money is now there to compound until you reach 55 or later. Or pass onto your children, tax free.
The above is not intended to be a comprehensive list, and there were a number of points I took off as it was getting too long. But hopefully it may help a new investor to refine their thinking. As a new investor you don’t have to lose money to learn lessons.