A Fool's favourite tips from Free Capital's very successful private investors.
Guy Thomas's inspiring book, Free Capital, has a page dedicated to each of the 12 highly successful investors featured for their insights and advice. These are the ideas I've adopted, from both the book and the Fool's excellent Ten Steps To A Million report:
On decision making
1. Look for easy problems
'Degree of difficulty' carries no bonus in stock market investing. That's why I've stopped trying too hard to find my next investments.
These days, an investment opportunity must be face-slappingly obvious before I'll dig into it properly.
I felt that way in the summer of 2010 when oil company BP (LSE: BP) lodged at 300p after the Gulf of Mexico oil disaster. I couldn't miss it; the news was everywhere. So, I looked into the opportunity and bought a meaningful quantity of the shares.
2. Selective attention
Too many details can dilute focus. Now, I aim to distil investment decisions down to the facts that really count.
For example, fund manager Man Group (LSE: EMG) looks interesting at its share price below 100p based on its fat dividend payment. So, I'll focus on the cash flow that's going to pay that dividend and where it's going to come from. The directors have declared that future payments will be 100% of adusted fund management fee earnings, so an important metric is the funds-under-management figure.
3. Take your advice, not theirs
A consensus of investing opinion is rarely to investors' advantage because it's often already in the price.
When I bought BP near 300p, I had to think independently and take my own advice. At the time, many commentators thought that disaster costs might overwhelm BP and great fear surrounded the share. I focused on the company's cash flow and concluded that the company could survive. I later sold many of my BP shares at prices near 500p.
4. Better to be right than consistent
I could have been wrong about BP. I may yet be wrong about Man Group. If that proves to be the case, it's important to change my view as the facts change, and sell.
Similarly, if conditions change, it may be a good idea to change my approach to investing altogether.
5. Limit decisions to a few only
I'm aiming to make fewer investment decisions of higher quality.
Now, I trade less often and the positions tend to be larger to match the quality of the opportunity.
On understanding markets
6. Long and short cycles
Some of the 12 investors in the book try to time their investments in accordance with market cycles.
Cycles are everywhere, from company-specific product lifecycles to macro-economic cycles.
Recent events have focused many investors on these often interlocking and variable cycles. The fall of cyclical companies like Royal Bank of Scotland (LSE: RBS), Lloyds Banking Group (LSE: LLOY) and Dixons Retail (LSE: DXNS) has seen to that.
Just now, I'm betting on what I hope will be a sustained upswing from companies like Persimmon (LSE: PSN), Taylor Wimpey (LSE: TW) and N Brown Group (LSE: BWNG) each of which can be identified as operating within cyclical market trends.
7. Find a bull market
This is simple, but effective, advice. We are all heroes in a bull market so find one. Why invest against the grain?
8. Pick the right train
The simple message is to pick investment fields with long-term secular growth. It's good advice but not easy to do. It's a work in progress for me.
On portfolio management
9. Stick with your best ideas
Sometimes, holding on to a winning investment is the best course of action -- so I've been holding on to my winners for much longer than I used to.
10. Double and sell some
This is a great idea. Some call it top slicing.
If we sell, say, half when an investment doubles, it frees funds for other ideas, and allows a free-carried investment to run for further gains; it's a potential all-round winning strategy and something I'm planning on doing much more of in the future.
11. Dividends as a signal
Knowing when to buy and sell can be tricky, but one of the successful investors in the book reckons that a company's dividend decision summarises the whole picture: the results for the last year, the directors' view of the future and the cash position of the business.
12. Analysts and bulletin boards to gauge sentiment
City analysts' research and recommendations, and the quantity of bulletin board posts on the internet, can be great indicators of the sentiment surrounding a share, and contra-indicators for the quality of the investment opportunity.
If the growth projections are good and investors are raving about a company's prospects, there's a good chance that the optimism is already in the price. The reverse is also true.
Foolish bottom line
So there we have 12 pragmatic and tested tips from 12 highly successful investors that I'm putting to work in my own portfolio. Feel free to discus them in the comment box below.
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> Kevin owns shares in BP, Man Group, Royal Bank of Scotland, Lloyds Banking Group, Taylor Wimpey and N Brown Group.