A good investor aims to generate reasonable returns from the investment portfolio aligned with the financial plans and commensurate with the financial objectives. However, there is no 'one size fits all' investment strategy that can be advised for all investors.
Investing is not a science but an art. While one may read all the financial literature to understand the financial markets, investing skills demand more than technical skills. However, certain fundamental investing principles can be universally applied across different investing strategies.
Here are five investing lessons from a good investor:
01
Incorporate a margin of safety and invest within your circle of competence.
Benjamin Graham, who co-authored Security Analysis and authored The Intelligent Investor, coined the phrase "margin of safety"."Graham's margin of safety is the difference between a stock's price and its intrinsic value. In theory, the further a stock's price is below its intrinsic value, the greater the margin of safety against future uncertainty. The concept of margin of safety is one of the most important principles for investors, who are best placed to invest according to their "circle of competence" and focus on their expertise. The most outstanding investment records have been built by people who specialise, develop a deep understanding and stay within their circle of competence.
02
Be prepared to walk away.
It can be difficult for investors to walk away and sell an investment after something goes wrong, but if the due diligence does not ultimately support an investment case then the investor must be prepared to walk away and wait patiently.
03
Focus on the batting average.
To develop an outstanding batting average, it is far more important to minimise the inevitable investment mistakes than be obsessed with trying to find the 10 time investment winners. Extensive investment due diligence and staying within your circle of competence is critical to improving the investment batting average. It is useful to note that very few tennis players have won the US Open or Wimbledon with a high unforced error rate.
04
Do the analysis and think independently.
It is also important to understand that being contrarian does not make you a good investor.Many investors have caught 'falling swords' by seeking to be contrarian when other investors are panicking. Magellan undertakes extensive analysis before making a contrarian investment call in order to avoid catching the falling sword. Our investment returns over time will depend on whether our analysis of the economics and competitive positioning of a business is correct.
05
Understand opportunity cost
An investment opportunity looked at in isolation can often look attractive. A proper assessment of opportunity cost takes into account both the expected return and risk in comparison to the next best alternative. In assessing an investment opportunity we should look at what the investment will do to the portfolio's expected return, quality attributes, volatility risk, and currency exposure, and if it shares underlying business risks with other portfolio holdings. Often, the best course of action is to invest in what you already own. Take the analogy of a footbal team. Yur portfolio consists of around 25 players and each player has a role to play in winning the game. Some stocks play a defensive role and some play an offensive role. You seek to place the best players in each position and when considering a new investment you ask yourself which player (or stock) you are prepared to replace it with. By doing so, you are actively assessing the opportunity cost of new investments. Finally, let's end with a quote from Charlie Munger which summarises the qualities of a good investor: "Preparation. Discipline. Patience. Decisiveness."