If anyone plans to buy shares in 2023 and wants to know what the best investment strategy is, I can’t tell them. Each individual investor needs to understand their own aims, ability and comfort zone, and make their own decisions.
But I can describe a few thoughts that have worked for me over the years. And I can pass on a bit of the guidance that I’ve picked up from the world’s best investors.
My first conviction is that investing for the long term can give private investors an edge. And I think that’s especially true when we’re in a market downturn.
I’ve seen plenty of downturns, and I’m sure we’ll have plenty more. That’s why my investing horizon has always been at least a decade ahead. And it’s why I welcome market weakness as it can provide opportunities to buy more shares cheap.
My most important guiding principle these days is Warren Buffett‘s first rule of investing: “Never lose money.” And, of course, his second rule: “Never forget rule 1.”
Looking back over the past few years, I reckon debt has been among the biggest killers of investment returns. Some companies can thrive on debt-funded gearing for years, and that can be fine when business is good.
But in a downturn, servicing debt while revenues and profits are falling can be a killer. Some of the companies worst affected by the pandemic crash were those who entered it with their balance sheets groaning under the weight of debt.
Cash is king
Another common investing guideline has become very important to me. “Revenue is vanity, profit is sanity, cash is reality.“
Would I invest in companies with growing revenue, but which are yet to record a profit? I’ve done that only occasionally over the years, and I’d almost certainly never do it again.
More than that, I’ve seen so many instances when reported profits looked good but a company was suffering a cash flow crisis. So I want to see good conversion of profits into actual cash. And I want to see that cash making its way into shareholders’ pockets.
That brings me to dividends, which form a cornerstone of my investment focus. But even high dividends can be deceptive. Dividends catch the headlines, and company directors will frequently prioritise them above other considerations.
But that can sometimes lead to years of dividends being poorly covered by earnings, and debt accumulating. Eventually, something has to break. And investors can suffer unexpected losses.
So it’s all about cash generation for me, and I like to see it supported by something else too. That’s share buybacks. They happen when a company has excess capital to return, above its annual dividends. They might not look as immediately attractive as a one-off special dividend. But I reckon the long-term benefits, with future earnings and dividends spread across fewer shares, makes buybacks worthwhile.
So, in short, my 2023 investing strategy is all about low debt, healthy cash flow, and reliable shareholder returns.