Nobody said life would be easy – especially not if you’ve chosen the life of a stock picker.
These days efficient investing can be a five-minute decision. Buy a diversified basket of index funds, check in on them once a year to ensure your allocations haven’t got out of whack, and spend the rest of your time bingeing on Netflix / at the beach / at work / bingeing on Netflix at work wishing you were at the beach.
Those of us who do still invest in individual companies – whether because we fancy trying to beat the market for higher returns, or just because we love the challenge – know we’re signing on for much more work.
From analysing company fundamentals to reading trading updates, monitoring the economic news, and standing in front of High Street stores trying to decide if what you’re looking at is the next big thing – the job of an active investor is never done.
However we don’t need to make it even harder than it already is.
I believe there are shares that none of us should invest in, and I believe many of us have our own additional landmines or no-go areas we should steer clear of.
Rather than agonise over the pros and cons of such ‘opportunities’, I say skip them and move on to one of the many thousands of other candidates just a click away these days.
To kick start your own don’t-touch list, here are five types of investments that have me shouting “Next!”
1. You don’t understand what the business does
This is very common with high-flying technology companies. You ask somebody what the business does, and at best they recite a few buzzwords they got off the first page of the annual report – or from an investment forum or magazine, or even from Twitter.
Then they point out the share price has doubled.
Sure, a profit is a profit. But if you don’t really understand how a company makes its money, how can you assess how well it’s doing, how big the opportunity is, and what the shares might be worth? You might as well bet on a racehorse.
2. There’s someone shady running the company
You might be surprised how often the same dubious people turn up running companies, especially in the small-cap arena. Typically they’re charismatic promoters who persuade a gullible cohort that the last business went wrong for some reason outside their control, but never mind, they’re shooting for the moon this time.
Pause for a moment and everything they say seems awfully confident for a micro-sized business that’s losing money and is ignored by serious investors.
Very occasionally you’ll miss a profitable opportunity if you avoid everyone your gut warns you away from, and of course there’s an element of subjectivity here – one man’s Elon Musk is another man’s P. T. Barnum.
But given all the great companies out there run by straightforward people, you don’t need to get chummy with charlatans.
3. It seems too good to be true
Most of us know you shouldn’t put your savings into a product promising 10% a year ‘guaranteed’ when interest rates are barely positive, let alone listen to any boiler room puff-peddler on the phone.
But even sophisticated stock pickers can be sucked into believing so-called ‘blue-sky’ stories that disappoint year after year. The management isn’t crooked, but they do see the world through three pairs of rose-tinted glasses.
I recently read a report from a small cap whose technology the chairman boasted the world could not do without. Really? Then why is his company losing millions and why has its share price crashed from nearly £2 to barely 2p in just five years?
Perhaps the world can live without it, after all.
4. The company offends your principles
Life is too short and full of care to make money from an investment that stops you sleeping at night.
In a nearly two decade-long investing career I’ve lost money more ways than I care to remember. But at least I’ve never lost sleep thinking about somebody dying of lung cancer and knowing I made money from a tobacco stock.
That is a personal decision. You might say smoking is legal, so what’s the problem? And I respect that view. But equally, you might be terrified for the future of your children given the climate crisis and so avoid the likes of Royal Dutch Shell or maybe you saw a family member bankrupted by a gambling addiction that steers you away from William Hill.
I have a barrister friend who blames most of society’s crimes on alcohol. He won’t touch a drop of Diageo.
I’m not here to preach. I’m simply saying that if you want to stick with your company through thick and thin – or even just assess it rationally – then it will greatly help if you don’t hate the business it’s in.
5. You’re not investing for investing’s sake
Finally, a catch-all category that causes more investing misery than you might suppose.
These are investments made not because you love the business, nor even because you love the price you’re paying for the business but because…
- …your friend told you to invest and you want to keep them happy
- …everyone else has already made money in it and you’re afraid of missing out
- …you believe it can make the world a better place, even if it loses money for you
- …you hate the company and you’ve already lost half your money on it but you want the price to double before you will sell and move on
- …a myriad other reasons!
Picking winning shares is hard enough without these complications!
Always remember the market doesn’t care why you invested in a company, what price you paid, or where you need a share price to get to breakeven – or indeed anything else except what the majority of people will pay to own its shares right now.
You should own a share because you like the business and you like the price it’s trading at. Save the rest for supporting – or even betting – on your sports team!
