After six years running 5i Research, it’s clear now that we enjoy helping individual investors much more than we enjoyed managing mutual/hedge funds in our prior career. While it is of course great when we can help a do-it-yourself investor make some money, we enjoy it just as much if we can help someone avoid losses.
Many times, our investors have asked us what the key is to being a good investor. There are lots, of course, but let’s focus on five facts that we know for sure to be true:
Be an optimist
Sure, there are lots of naysayers out there in the world, predicting doom and gloom. But we have met very few rich short sellers. Over time, markets rise. If you are an optimist and can see the bright side of things, you are far more likely to be a successful investor. That stock that has doubled? Optimists think it can double again. Pessimists don’t see the upside and sell too early. Guess who does better longer term?
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We have talked about this before, but it bears repeating. Analysts work for companies, and for their bonuses, not for you. Overweight, underweight, neutral weight, market perform, target prices: Ignore them all. Analysts are very smart people. But like you and I, their ability to predict the future is pretty much zero. When talking this point, we always need to mention the Credit Suisse report from 10 years ago where the analyst said to sell Netflix (NFLX on NASDAQ) and buy Blockbuster Video instead (delisted, bankrupt).
Remember that the investment industry wants your money
I once had a boss who asked the executives at the boardroom table why our company did not manage ‘all’ of our clients’ money. We were doing very well (at the time) so why was the money not pouring in? We decided to create some new products to ‘entice’ investors to give us more of their assets to manage. Keep this in mind: The investment industry will create — and sell — products that it thinks you need. With some encouragement from your broker, you might be tempted to buy some of these trendy products. You ‘might’ end up with a good investment. But more likely you will end up with a high-cost, trendy product that pays fees to your investment manager and none to you. If your portfolio is doing well, why on earth would you want something new with embedded fees in it?
Remember you are going to take some hits along the way
If you do not experience a big loss in your portfolio once in a while, you are (probably) being too conservative. Yes, the losses hurt. But the math is in your favour. You can make 10,000 per cent on a stock (like the aforementioned Netflix over the past 10 years) but you can only lose 100 per cent on a stock. You will not be able to get those big giant winners without ‘reaching’ a bit for growth. It won’t always work, but when it does your portfolio will be able to absorb lots of losers along the way.
Don’t chase trends but let your winners ride
This ties in with the above. We love letting winners ride. A stock doing well means one thing: other investors like it. You have friends now buying. Success attracts attention, and attention often leads to higher valuations. We are happy to let stocks go to 10 per cent of a portfolio (we get nervous after that level). But, riding your winners is completely different than chasing trends. Is your portfolio filled with bitcoin and marijuana stocks?
If so, you may be a trend chaser. Stick with growing companies performing well, rather than ‘hoping’ a trend continues. Micron (MU on NASDAQ) is one example. Up 126 per cent in a year, it still only trades at 8 times’ earnings. Contrast that with cryptocurrency stock HIVE Blockchain Technologies (HIVE on TSX-V) down 61 per cent this year with a negative price/earnings ratio due to losses.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors