Learning from the successes and mistakes of others can provide valuable lessons in investing, as elsewhere. Here are three investing lessons I hope can help me build wealth over the long term.
1. Find great share valuations
A brilliant company can make for a terrible investment.
At first blush, that might seem hard to credit. After all, if a business does better and better over the years, wouldn’t its shares do well too?
The answer to that question depends on their initial valuation. If I pay too much for a company’s shares, I could end up seeing the value of my holding fall over the years even if the business does well.
So one of the investing lessons I have taken from legendary stock-pickers like Warren Buffett is that often it is not enough simply to find brilliant companies. One also needs to buy into them at an attractive price.
2. Do less, not more
Another striking feature of Buffett’s career, as well as that of many other investors, is how much their returns are driven by just a few great choices.
Take Scottish Mortgage Investment Trust as an example. Its investor returns over the past decade or so have been driven by a wide range of investments in dozens of different companies. But what really moved the needle was the trust’s prescient investment in electric vehicle maker Tesla before such a move caught the imagination of the wider stock market.
Investing in just a few great companies can do more for one’s returns than buying into dozens of businesses that are merely mediocre. In recent years, well over half of Buffett’s portfolio has been concentrated in just a handful of shares. That in itself is an investing lesson that I have tried to apply to my own portfolio management.
3. Ignore the noise
When the market does badly, it can be tempting to unload shares in the fear they will keep falling further. Conversely, in boom times, many investors pile into shares that already look overvalued, because they hope momentum can keep pushing them ever upwards.
Investing is different to speculation. It is not about trying to benefit from short-term price swings. Rather, long-term investing involves developing an investment thesis for a given business then acting on it when doing so seems potentially lucrative.
That can mean putting money into a company when its shares have been battered and many commentators are negative about its prospects. It can also mean deciding not to invest in a share that other investors are piling into as it goes up in value day after day.
Such an approach takes discipline. Ignoring the market noise can be tough. But in the long term, if I have done my research correctly and feel confident about a firm’s investment case and valuation, making my own choices could hopefully help me to build wealth.
