For those looking to outperform the market (and who isn’t?) the best place to look is towards those individuals who have managed to do it consistently. Luckily, there are a few prominent figures who have achieved this and a wealth of information on them to provide us with investment tips to pore over.
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
This one quote effectively distils Buffett’s attitude to investing into one sentence – though his advice is worth looking at it in more detail. The principle behind this sentiment is to buy quality companies that you’re prepared to hold for the long term.
Right now, we’re experiencing a particularly long bull market, which means that there’s more and more chatter of a potential downturn. This can be worrying to someone invested in the market, but one protection from that kind of concern is to own shares in companies that it’s easy to have faith in. Even if the market suffers, a quality company can ride out of it and potentially emerge stronger as a result.
“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.”
A complement to the investment tip expressed by Buffett is Lynch’s simple advice: do your homework. How do you know if a company is a good long-term investment? Research.
If you’re not carrying out research then you’re effectively gambling on the stock market. As Lynch points out, you would be better off going to a casino and losing your money whilst getting a free drink at the same time.
“The best values today are often found in the stocks that were once hot and have since gone cold.”
Buffett’s mentor and the author of several canonical investment books, the quote itself comes from The Intelligent Investor and the ‘today’ referred to was in 1949. Is the investment tip any less valid? Not at all.
A good example is the current year-to-date’s top performing FTSE 100 stock, Evraz. It’s up 163% but how was it doing in the full year prior? It was down 4.7%. This isn’t to say that I go out and look for the worst performing stocks and buy in, but it’s always worth keeping a lookout for a company that might be ready for a big turnaround.
“Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.”
There are a few things to consider in this investment tip but the most important one is to determine risk when buying a stock. Is there a big potential downside to investing? I ask myself this before purchasing shares in any company, no matter the scale of investment, and then determine whether I’m prepared to take that risk. If I can’t see a stock suffering a big loss in value and it still retains a strong potential upside then, as Greenblatt notes, I’m onto a good investment.