You can reap huge benefits by following these simple steps.
It can be intimidating, trying to invest on your own.
Even seemingly easy-to-understand companies like Vodafone (LSE: VOD) and Tesco (LSE: TSCO) present problems. Both have provided decent returns over the past few months, but both have more than 15 analysts covering their every movement, and it's hard to wade through all the analysis and earnings reports. Information overload can lead investors to lose focus on what's important.
Fortunately we have a history of illustrated success from some of the world's most prominent businessmen to guide us. These masters have figured out ways to take advantage of great investing opportunities by implementing some simple tactics -- and these are the tenets that you should follow when you're investing on your own.
Riding The Market Solo
Leading investors like Warren Buffett look for companies with similar traits. You can reap huge benefits in your portfolio by following four simple steps:
#1 "In business, I look for economic castles protected by unbreachable moats."
-- Warren Buffett
The first thing you want to do is look for companies with economic moats; that is, businesses that have distinctive advantages in their competitive landscape.
For instance, a company like Diageo (LSE: DGE) with its leading brands like Guinness, Johnnie Walker and Smirnoff, is entrenched behind a deep moat.
Rightmove (LSE: RMV) dominates the online real estate market, and continues to benefit as advertisers move from print to online. As evidenced by some of the highest profit margins of any quoted company, Rightmove enjoys a dominant position, with little chance of being knocked off its perch for years to come.
#2 "The Defensive Investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition."
-- Benjamin Graham
Finding a company with a strong balance sheet and record of success is extraordinarily important. Little known FTSE 250 asset manager Ashmore Group (LSE: ASHM), for instance, has absolutely no debt on its books and has huge profit margins. In addition, it has come through the credit crunch and Great Recession relatively unscathed, with its share price currently just below its peak of 2007 and 2008.
#3 "Management is doing things right; leadership is doing the right things."
-- Peter Drucker
Short and to the point, Drucker identifies the third most important factor in finding a great share: great leadership.
Most significantly, we look for companies that have substantial inside ownership (so management's goals are aligned properly with shareholders'), long management tenure, and superior stewardship.
Look at the aforementioned Ashmore Group for a prime example. The chief executive is Mark Coombs, who founded the business in 1993, led a buy-out in 1999 and has been in charge ever since. He owns 43% of the company, a stake currently valued at around £900 million. Building that sort of wealth doesn't happen by chance.
#4 "Diversification should be the cornerstone of your investment program."
-- Sir John Templeton
In order to spread out the risk in your portfolio, you should choose shares in various sectors so as to minimise the possibility of simultaneous losses.
This doesn't mean you should go outside your area of competence; if you don't know anything about energy, don't buy an oil company. However, a good example might be buying a recession-proof company like Morrison (LSE: MRW) and a microprocessor company ARM Holdings (LSE: ARM).
If the economy suffers, revenues would tend to increase at a low-price grocery outfit like Morrison while less money, in general, would be spent on the more discretionary items that ARM's chips typically power. The opposite would most likely occur in an upward economy.
Aligning Your Goals
When I think I have found the solution, I must prove I am right. I know of only one way to prove it; and that is, with my own money."
-- Jesse Livermore
That's why we created Champion Shares PRO -- where we put £50,000 of our own money on the line, and Maynard Paton and David Kuo will manage the portfolio so our Fool Community can follow along. With this cash at stake, you know that they are going to be choosing the best shares across all sectors in order to create the most robust portfolio possible. If you are keen to get in on the ground floor as they choose their very first shares, click here to find out more.
More on the economy and the markets:
> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
