Is it hard to start investing?
I do not think so, although I think it can be hard to do it well. In some ways, experience might help – but there is only one way to get experience!
Here are three rules I follow now that I also stuck to when I began investing. I believe they can help me improve my long-term performance in the market.
Rule one: zoom in on key themes and ignoring everything else
With thousands of shares listed on the London and New York stock exchanges alone, it can seem hard to know where to start investing.
But I think it makes sense to ignore most of those companies. My approach is to stick to specific investment themes.
Those can take different forms but commonly they are based on industry areas. Like billionaire investor Warren Buffett, I aim to stay inside my ‘circle of competence’.
I feel I understand the UK retail space, so I am happy weighing the pros and cons of buying shares in Greggs or Tesco.
Cross-border business-to-business payments in developing markets is an area with which I am less comfortable, however. So I would not consider buying shares in CAB Payments.
That does not mean I think it is an attractive or unattractive share. I simply lack the familiarity with its business space to be comfortable deciding whether to put my hard-earned cash into its shares.
Rule two: think about risk at least as much as reward
People invest to try and get richer. So there is a cognitive bias: many of us tend to focus on the potential benefits of a buying a share while downplaying the (often very real) risks involved.
As Buffett says, the first rule of investing is not to lose money – and the second rule is never to forget the first.
I think that underlines an important point. Losses may be almost inevitable from time to time. But serious investors take risk seriously.
Spotting why a business might do very well can be easy. Spotting why it might not can be much harder.
Rule three: buy your number one investment idea – but buy others too!
This approach to managing risks also helps explain why I keep my portfolio diversified.
It is easy when one starts investing to fall in love with a single share. But even a great company can meet difficulties – and even when it does not, a too-high valuation can mean a brilliant business makes for an unsatisfying investment. Hence the need for diversification.
As an example, consider a holding in Judges Scientific (LSE: JDG) that I sold earlier this year because I considered the share price to be too high.
I think Judges is a great business. It has consistently raised dividends annually in double-digit percentage terms, it is strongly profitable, and its niche of manufacturing scientific instruments for specialist users gives it significant pricing power.
But several of its businesses had what it termed a “challenging” first half. In a trading update this month, the company said that order flow meant it might not even hit full-year sales expectations despite having cut them already in the summer.
Judges shares are up 58% over five years — but have fallen 32% since May.
