Here are three secrets of highly successful investors.

Avoid losing money

This rule sounds obvious – but thinking about it more deeply shows why it is so important.

If we achieve 20% returns a year for four years in a row, then we’ll more than double our money. But a 50% loss in year five would take us almost right back to where we started. All it takes is one bad year to wipe away years’ worth of returns. 

Warren Buffett knows this, which is why his first rule is “Don’t lose money“. 

Rule number two? “Follow rule number one“. 

Concentrate and then diversify

One of the best ways to achieve wealth is to concentrate our money into our best ideas and let these investments grow. As our portfolio becomes larger, it makes sense to start diversifying so we can protect our wealth.

Successful investors know that as their portfolio grows, the more damage a bad year can do.

They seek to minimise the damage by diversifying into other stocks and other asset classes such as property. If we have a portfolio of 20 stocks that are equally weighted – any stock that went bust with a 100% loss would deliver only a 5% total portfolio loss. 

By spreading their risk, successful investors ensure that they are never in a position to be hurt too much. 

Think long term 

Highly successful investors know that long-term thinking is important. Warren Buffett has earned 19% per annum over his investing career, and he’s one of the richest men on the planet. 

Never underestimate the power of compounded gains. 

Create a plan

“I’m just going to invest and hope for the best” said no successful investor, ever. 

Highly successful investors are disciplined and they treat investing as a business. When done correctly, investing can be financially rewarding and the stock market is a proven wealth builder.

However, just as the stock market builds wealth – it can also destroy it if we make too many speculative or unresearched investments.

Successful investors know what their goals are and they know exactly how they want to achieve them. Create a plan for yourself. work out a realistic target return and what would be needed to achieve that. It’s also necessary to create an investing checklist, so that we can filter out any bad stocks and ensure that we are putting our wealth to work properly in the stock market. 

By following these four secrets of highly successful investors, you too can profit from the wealth that the stock market has to offer. 

The post 4 secrets of highly successful investors appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

They’re wrong.

Their only competition is themselves. Stock market investors go through a huge range of emotions, from excitement and greed, to fear and self-loathing. But fear not – there are several ways that we can manage our heads in this game and not make some common mistakes. 

Have a self-imposed limit on position size

By having a limit on how big our position is, we are able to stop our greed from ballooning out of control. When we spot a good opportunity in the market, it’s natural that we want to put our best ideas to work there. But this is dangerous – what if we are wrong?

Using a limit on position sizing will prevent us from being burned should we be wrong. If we do pick a winner, then one stock can easily become a large percentage of our portfolio – meaning that our portfolio’s performance is now correlated with that stock. With a position size limit, we’ll be forced to trim the position and bank profits as the position size increases. 

Look for reasons to not buy 

We all love buying stocks. But what we should be doing is looking for reasons not to buy the stock right from the start. That means doing some digging, and looking at whether management are aligned with shareholders. Check the director salaries. Check the director shareholdings. Are they clock punchers? Or are they well motivated to create and deliver shareholder value?

It’s also worth looking at what the company actually does, and going out to speak to its customers. If the customers tell you that the product is nothing special, then that means it is easily replaceable. And if it’s easily replaceable, then it has no moat. 

Check the company’s moat

If a company doesn’t have a moat, then it offers nothing to protect itself from copycats. That means anyone could set up as a competitor and erode our target company’s margins. Always check for the moat and see how strong it is.

Understand why you’re buying and when you’d sell

According to Sun Tzu from The Art of War, a good general wins first then battles. That is exactly what we should be doing with our investments.

If we understand why we’ve bought, then even if the price is showing our position as buying in the red, then we must remember why we bought in the first place and not get scared and shaken out of our position. 

We should also know at what point we’re happy to sell. If certain aspects of the business change, then we know we should sell our shares in the stock. 

Know what our sell triggers are, and then monitor the stock. 

The post How to manage your psychology in the stock market appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

For that reason, growth stocks have been in favour, and many investors have cashed in on the capital growth that many of these stocks can offer.

Here’s how to invest in growth stocks.

Find a growing market 

First of all, we need a growing market to find a growth stock to invest in. It is no good investing in a growth stock in an industry that is on its way out. Think of photography film or DVD rental.

We want stock in companies that have an expanding and growing market, in which they will be able to attempt to take a slice of the pie on offer.

Find a stock that is growing its revenues quickly 

We want stocks that are able to grow their top-line income. Stocks that can aggressively grow their business in the marketplace will see increases in revenue. While in the growth stage, profits are not so important as long as the business can expand and eventually turn those large revenues into profits. 

Companies that have a first mover advantage in a growing industry can be excellent growth company prospects, so long as the business can demonstrate high – and preferably accelerating – levels of growth.

Find a stock that is operationally geared

Stocks that benefit from operational gearing can be highly attractive growth investing candidates. Businesses that have fixed costs can see more and more of that revenue drop to the bottom line in profit when the business scales up. For example, a company that has a fixed-cost platform will need enough business to cover its costs. Once those costs are paid for, every penny of income then becomes profit, thus increasing the company’s margins.

Find a company that has a high ROCE

Return on capital employed (ROCE) is the company’s interest rate. If a business can invest £100 into its own business, and in return receive £120, then we would say that the business has a ROCE margin of 20%. Given that compound interest works exponentially, the company could then reinvest the proceeds into the business and grow even faster. 

Find a business that is light on capital expenditure

Companies that do not require high amounts of capital expenditure on the maintenance side can grow incredibly quickly. Businesses that require heavy capex spend on things like machinery and equipment must spend in order to keep their business afloat, rather than pump that cash into further growth. 

By identifying businesses that fit these parameters, there is a good chance that you have found an exciting growth stock. 

The post How to invest in growth stocks appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In my opinion, accounting shouldn’t be generally accepted. It should be exact. The more discretion that is allowed in accounting, the more opportunity there is for the numbers to be cooked and fiddled with. 

But no matter how exact the accounting laws are, there will always be industrious accountants searching for ways to hide things the company doesn’t want its shareholders to see. 

Here are two accounting tricks that you should be aware of. 

Channel stuffing

Channel stuffing is the practice of sending retailers more product that the company believes its distribution channel can actually sell. The product is then booked to the profit and loss statement despite the inventory not even being properly sold, which is the “sell-through“. 

It could also be that the product is returned to the company, meaning adjustments need to be made to the P&L. Many companies will try to stuff their channels right before the end of their results period, in order to meet its targets. This is not too dissimilar to Tesco‘s accounting scandal in 2014. 

While there are no laws against channel stuffing, the procedure is frowned upon and many investors do not take it positively. There can be legitimate reasons for increasing inventory through the distribution channel if the company genuinely expects sales to be higher and wants its distributors to be prepared, but often the process has been abused by management fearful of taking hits to their execution remuneration, which may depend on certain targets being hit. 

The post Two accounting tricks you should be aware of appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

By analysing and digging deeper into the profit, we can see exactly where it comes from and how it is converted into profit. 

While £1,000 of profit will always be £1,000 of profit, there can be important differences in the quality of that profit. And the quality of the profit can have a significant impact on the quality of a portfolio, making the difference between a successful investment that continues to grow in value and a short-lived investing regret.

Let’s take a look at how to check the quality of a company’s profits.

Identify what type of revenue the profit comes from

When checking the quality of a company’s profits we need to look out the sources of that profit. There is a big difference between one-off sales and recurring revenue.

For example, a company may have single large orders every few years at random, or it could have a steady and increasing level of orders every year. We can be much more confident investing in a company with regular and growing business, than in one that gets big orders, but few and far between.

Furthermore, if the company is able to lock its customers into a subscription model, in which premiums are paid on a recurring basis, then we can be even more confident of the revenue being secured.

Single customer risk

Which company would you rather invest in: a company with lots of customers, or a company that has a single customer that makes up a large portion of its revenue?

The latter company stands to lose a lot more if that single customer runs into trouble or decides to pull the plug on its orders. A company that has a broad and diversified client base does not need to worry so much. 

The quality of the customer

This is another factor that we should focus on. Customers who are small and growing, who aren’t able to finance their own operations from funds generated internally from the business, should be classed as a much higher risk than a company that is established and more mature. 

While the growing company may end up increasing its order rate year on year, if the business is dependent on further cash injections, then there is a risk that the available credit and funding eventually dries up leading to a collapse. 

Focusing on the quality of the customers of the companies that you invest in can have a big impact on the quality of the profits that your investments generate. 

Clearly, not all profits are created equal. By looking at the type of revenue, how the revenue is split among the company’s clients, and the quality of the customers themselves, we can learn a lot about the quality of a company’s profits. 

The post How to check the quality of a stock’s profits appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Value investing has been made famous by Benjamin Graham, often called the father of value investing, and the teacher of a certain Warren Buffett. 

Benjamin Graham believed that a good stock to invest in should have a ‘margin of safety’ that would protect the investor from material downside. His idea requires buying a stock for less than the sum of its parts, or its book value. Value will always eventually be recognised, however, the investor must be prepared to wait for the catalysts that will unlock the value, or for market sentiment to turn in the stock’s favour. One problem of value investing is that it requires patience.

Buying a stock for below net asset value

To identify a stock that is trading below its net asset value we need to study the balance sheet and work out the total value of the assets, and the total value of the liabilities. This is often totalled already for us on the balance sheet and so it is a simple case of subtracting liabilities from assets. If the number is negative, then that means there is no net asset value and we have net liabilities instead. We want to avoid those stocks, because if we want to value invest there must be some value existing!

One thing to be careful of when looking at net asset value is that assets can both be tangible and intangible. Tangible assets are things such as cash, property, and machinery, whereas intangible assets can be the value of a brand or intellectual property. This, of course, is subject to management discretion.

Look for net tangible asset value

By stripping out intangible assets, we are left with a net tangible asset value, which is the sum of everything that exists and is real. This gives us an even bigger margin of safety, because ultimately something intangible is only worth what someone else is willing to pay for it. Of course, that is also true of tangible assets – but at least they have a generally agreed-upon intrinsic value.

Check the depreciation policy

When looking at tangible assets, it is important to check the company’s depreciation policy. For example, if we bought a new car, we would not expect to be able to sell it five years later for the same amount. Something must be deducted for the wear-and-tear on the vehicle. This change in value is accounted for on a company’s books by depreciating the asset over the course of its useful life. Make sure that the depreciation policy is realistic.

When investing in value stocks, we must always check the balance sheet carefully. 

The post How to invest in value stocks appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Income investing has not been that popular lately, given that we have been in the greatest bull market of all time. Momentum and growth at a reasonable price investing styles have been more in favour. 

But as we get older and richer, capital growth becomes less important and income becomes more important.

Here’s how to invest in income stocks.

Find a company with an enduring moat

When it comes to income, we want to make sure that our investment is protected with a large moat. We want stocks in companies with untouchable positions in their markets – think Coca-Cola. Any drinks start-up funded with a few million is not going to make a dent in Coca-Cola’s global domination.

Or what about Unilever? It’s highly likely you have several of its products in your house. Anyone wanting to take on the might of Unilever would have to fight on many fronts to wrestle sectors and territories from the company’s vise-like grip.

Find a company with strong and stable cash flows 

Companies that generate consistent cash year-on-year are quality candidates for income investing. We don’t want a business that one year makes a huge amount of cash only to do poorly the next. Companies that are able to convert plenty of their steadily growing profits into cash are companies we can consider for a dividend-oriented portfolio.

We also need to make sure that the dividend is more than several times covered by cash flows. A good rule of thumb is that the dividend should be covered three times. That way the company can manage minor problems without any risk to the dividend. It would take really serious problems to raise the risk of the dividend being cut.

Find a company where the dividend is not likely to be cut 

If a company has a dividend yield above about 8%, it may be a sign that the market does not view the dividend as sustainable. 

The market is normally efficient regarding larger-cap stocks, so if a company with an usually high dividend yield were a good investment, then everyone would take advantage – which would increase the price and reduce the yield.

Ideally, we want a moderate dividend yield of about 3% to 5%. A long track record of sustained dividends, or even better, of growing dividends, is also something to look for in a candidate for an income investor’s portfolio.

By picking companies that have enduring moats, consistent cash flows and a high profits-to-cash conversion ratio, as well as a sustainable dividend, we can create income portfolios that will grow in a slow and steady manner. 

The post How to invest in income stocks appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Michael Taylor does not hold a position in any of the stocks mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The accounting equation

Most people will be familiar with the accounting equation, but if not here it is: Assets – Liabilities = Equity

Equity, or shareholder equity, is what is left over once the liability holders have taken their share. If the company were to go bust tomorrow, then the liability holders would have first claims on the assets, with any leftovers going to the equity holders. 

The accounting equation is important because it is the assets of a business that are important. Clearly, the assets have to be of a high enough quality to generate value for the business, and ultimately its owners, we shareholders. 

Check the company’s assets year-on-year

By looking at how the financial health of a business changes every year we can see how healthy the business is and this will help us decide whether we should hold on to our shares or potentially take the plunge with a firm. If cash has increased substantially, then it’s worth checking out the cause of that consequence. 

Was it because the business was cash generative? We can check the operational cash flow statement here? Or was it because the company sold a lot of equity for cash and diluted shareholders? We can check the financing cash flow statement here. 

How have the company’s tangible assets changed? It is worth checking management’s policy on depreciation here, and again for amortisation when checking the company’s intangible assets. 

Check current and non-current liabilities

The company’s liabilities are very important. This is because if the liability holders become too nervous, they can call in their loans. If the company is not in a financially stable enough position to pay these off and survive, then the business cannot continue.

Check the company’s current debt — debt that is to be paid in the next 12 months. This can be trade payables or administration expenses.

Also check also the company’s non-current debt — debt that does not need repaying in the next 12 months. This can be bank debt, or loans from shareholders or other directors. 

One thing to be aware of too is if the directors are lending money to the company and whether they are then incentivised to see the business collapse so they can pick it up cheaply. This is a very real risk with some firms and something of which to be aware.

The balance sheet and other financial documents 

The company’s health is carefully laid out in the balance sheet, and for any serious investor it is important to check this alongside cash flow statements in order to make proper sense of the business.

Look at how much the company is burning through per period, and check the company’s cash balances. This will ensure that we are not buying shares in a business that will be launching a dilutive equity placing not long after we buy. Happy investing!

The post New to investing? How to check a company’s balance sheet appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Check their history

It’s important to look at a director’s track record in business and see whether they have been successful. If every company they have been at has seen an alarming decline in the share price – we need to know why before we invest.

It could be that the company just wasn’t able to succeed – but it could also be a result of incompetence. We don’t want to be investing in companies that aren’t able to succeed, and we definitely don’t want to be investing in companies with directors with a history of incompetence!

Check the board’s diversity

It is well-known that being on a board of directors is very much like an old boys’ network – where friends help each other out in gaining positions of influence. 

This can lead to some very non-diverse boards. Imagine a tech company that has its main product geared to both male and female teenagers – would we want a board made up of only men over the age of 70? 

Not only do we need to check the ages and genders of the board members, but also their skillset. 

Many businesses are now at risk of cyber attack, yet many boards have not managed to mitigate that risk effectively. This is because they don’t understand the risks and therefore can’t come up with an effective solution. Having various skillsets on the board, such as leadership, sales, and cyber knowledge, helps to build a more diverse and more successful board.

Check the board’s salary and shareholdings

Finally, we can check the board’s salary and their shareholdings. If the board are paying themselves exorbitant salaries that are increasing every year (we can check this in the annual report), then who are they working for? Are they working for shareholders or are they working for themselves?

We should avoid companies where directors are using the company as a vehicle to finance their own lifestyles. Checking their shareholdings (and where those shareholdings came from) is a big clue into the mindset of the director.

There is a big difference between £100,000 worth of options and £50,000 of shares paid for by a director’s own money.

Ultimately, we want to be investing in companies where the directors are entrepreneurial and stand to lose money if things go wrong, rather than directors who check in and cheque out. 

Reviewing the quality of the directors on the board will help you avoid bad investments. 

The post How to assess a company’s directors appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Benjamin Graham described the difference between the market price of a stock and the intrinsic value of the stock as the ‘margin of safety’. For example, if an investing company has a net asset value of 20p per share, but is available to buy at 15p, then the 5p difference is the margin of safety. This is because we would be able to buy the stock at a discount to its actual value. If the business shut up shop the next day, then surplus assets would be distributed to their owners – the shareholders.

Graham was a firm believer that investment is a business, rather than a game of speculation or betting. It involves a disciplined method that must be followed. The stock investor is not defined as right or wrong by the stock price, but by the facts and analysis.

Warren Buffett’s idea of the stock market being a place where everyday somebody turns up and offers a different price for your shares came from Graham.

Here are two pieces of wisdom from Benjamin Graham.

The intelligent investor is a realist who sells to optimists and buys from pessimists

The intelligent investor looks at every piece of the puzzle – they use all available information to come up with a fair value for a stock. If the current stock price is above this fair value, then the market is being optimistic. Graham would be interested in buying a stock that the market views optimistically.

Instead, he’d rely on there being a margin of safety, and buy a stock that the market is pessimistic about.

In the short run, the market is a voting machine but in the long run, it is a weighing machine

Graham believed that a proper investment decision is made on analysis of the financials and numbers alone. By focusing on what could be quantified, he did not take into account any exuberance or hatred of the stock, and went to work by focusing on what he knew best.

Graham understood that the market would change every day. He knew that people would always be buying and selling, and that this activity affects prices. But he also knew that ultimately the price would eventually reflect the valuation if he stuck around long enough and waited patiently.

He also knew that by ignoring the price action of a stock and focusing solely on the business, he would never succumb to the lure of a fast moving price.

It’s a lesson as relevant today as it was then. There’s always a reason to buy and sell every single day, as Mr Market turns up and offers us new prices on a daily basis. But just because there’s a reason, doesn’t mean that it’s a good one. 

The post Two things the father of value investing once said appeared first on The Motley Fool UK.

More reading

• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…
• SpaceX’s IPO threatens to leave the Tesla share price on the forecourt
• A once-in-a-decade chance to buy software stocks?

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.