How do you choose from thousands of companies? Just say 'no'.
Twenty years or so ago, I attended a one-day assertiveness course run by one of those American management guru types. I don't remember a thing about it except for one tactic; "the power of escalated refusal" -- the idea being that, when you don't want to do something, your second refusal is more emphatic than the first. If pressed again, your third is even more forceful etc. It comes in handy when dealing with car salesmen and the like.
The best investing tactic there is
So what's all this got to do with investing? Personally, I think it's the best investing tactic there is.
But don't take my word for it – ask the sage of Omaha himself, Warren Buffett. Buffett has been known to refer to his business partner Charlie Munger, as the "Abominable No Man" because that's the he usually gets when he asks his partner for his views on a potential investment. It goes without saying that Munger is Buffet's most valuable asset.
If you're the kind of person who is one of life's natural optimists, or if you're relatively new to the world of investing, or (less likely…) you've known only success so far, then you're in danger, and you probably need to learn the art of escalated refusal -- otherwise you may be heading for a fall.
It's amazing how many investors relatively long in the tooth continue to be taken in by the "next big thing"; a company with breakthrough technology, in some way, but which is hovering up investors' capital like a new Dyson.
Be a misery guts
Don't let it happen to you. Instead of looking for good things about a potential investment, be cynical and look for the worst. Let your opening mental response be: "No thanks, next question"!
I'm sorry if this goes against the grain, and you will miss the odd world-beater this way, but so be it. You're also far likelier to retain your capital and make a good profit in the long run.
If this approach doesn't sit comfortably with to your naturally trusting and ebullient nature, find ways of making it happen. Here are a few ways you can do that:
- Explain the basis of your investment to a friend or colleague -- preferably someone a little more cynical in nature. Peter Lynch reckoned you should be able to explain why you're investing in ways that are clear to someone else in two minutes -- "so that even a child could understand it". This brief explanation should include more than just the product/s and market/s. Make sure you can explain how and why the company's valuation looks too low to you -- and see if your "sounding board" partner agrees. In other words, find your own Abominable No Man.
- Devise your own checklist that suits your investing style and risk profile, then make sure you stick to it. Don't fall into the trap of letting the odd one slip through the net when times are good.
- Concentrate on the numbers only. If your initial Ben Graham-esque fag packet analysis -- which is purely based on numbers and takes no account, whatsoever, of qualitative matters -- doesn't make you see a bargain, ignore all other matters that may otherwise turn your head.
There are over 3,000 listed companies in the UK alone, so you're going to have to find ways of saying 'no' at the first stage, then double 'no' at the second as you sift ever finer in your search for investments. Good luck.
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