Only buy into great businesses -- and get them at a good price.
How many important investment decisions have you made in your life? Twenty, a hundred -- or is it closer to a thousand? I know it's closer to the latter figure in my case, and I also know this is the wrong approach, unless you're a true trader.
I've probably made 20 or so important investment decisions this year alone. It's a habit I need to break, and it's one I know many other investors get into.
The best advice of all in this comes from the top man, Warren Buffett. Mr Buffett advises us all to act as if we had just 20 investment possibilities for life, saying: "An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life."
In other words, we will enjoy superior returns from a relatively small number of shrewd decisions, as the Fool's own Champion Shares tries to do.
The best laid plans…
The trouble is, you hear this advice and think it wise, but then an interesting looking little punt comes along and you take a chance. Or maybe you don't? If so, well done. But for the rest, how many investors can look themselves in the mirror and say they truly follow Buffett's advice?
Imagine it for a moment; each time you make a decision, it takes you one closer to the end of the short line of 20. Just how serious would you then be about your decisions? I think this is an ideal investors should strive for, albeit an unrealistic goal.
Have you ever noticed how many shares you buy go down a bit further after you've bought? This is inevitable to a certain extent; you're very unlikely to hit the absolute low point. And when that happens, how do you feel? Is the cynical adage true for you that a long-term investment is a short-term punt gone wrong? If so, then this decision wasn't really one of your punch card 20. If it was, this price movement would probably please you, unless it related to specifically bad and unforeseen news. After all, you're in it for the long term for the right reasons … right!?
Remember; every investor's career is a summation of all the decisions you've ever made, including all those 1% of your portfolio punts. Remember, too, that there will always be another opportunity. You can afford to let a hundred great opportunities pass you by if you have any kind of doubts whatsoever. So treat each one like it really counts.
Stop, look, listen
A lot, or possibly most, businesses don't look all that great when you really dig down. Finding businesses that have high barriers to entry, which will be around for a long time, which demonstrate fundamentally good value -- and which are available at an illogically depressed price for some short-term reason or generalised market fear are few and far between. I think I've only ever found one that ticked pretty much all the boxes in recent years.
So stop yourself before you buy another (and I promise to try and follow my own advice here!). Now run your own checklist:
The company you're considering should:
- Be growing at a reasonable rate, long term.
- Demonstrate basic good value credentials such as a lower than average price-to-earnings ratio, a strong balance sheet and good cash flow.
- Have a history of steadily increasing earnings and an above average yield.
- Supply essential products or services and have a "moat" in so doing.
- Be trustworthy and prudent.
- Have a lower average enterprise value to sales ratio than its peers.
And perhaps above all, you should like what you see, have a good feel about your decision and understand the business you're investing into.
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