Speak to seasoned investors, and you often discover that they reckon to possess a particular ‘edge’. For some, their edge is the ability to drill down into a company’s financials, and dissect its balance sheet. For others, it’s timing: they reckon that they’re better than average when it comes to knowing when to sell or trim a position. And for others, it’s networking: they’re plugged into industry-specific online groups, for instance, or attend company meetings and presentations, and are generally close to the action. All of which is all very well and good, but it’s not for everyone….
Speak to seasoned investors, and you often discover that they reckon to possess a particular ‘edge’.
For some, their edge is the ability to drill down into a company’s financials, and dissect its balance sheet. For others, it’s timing: they reckon that they’re better than average when it comes to knowing when to sell or trim a position. And for others, it’s networking: they’re plugged into industry-specific online groups, for instance, or attend company meetings and presentations, and are generally close to the action.
All of which is all very well and good, but it’s not for everyone. And certainly, speaking personally, I wouldn’t lay claim to be particularly adept at any of those things — although I know people who are.
But each of us has another edge that we can use. And too few of us do. Which I’ve been reminded of in recent days, as I’ve watched investor reaction to several company announcements.
What counts is time in the market, not timing the market
There’s an old investment adage that you’ve almost certainly heard. It’s the words in the heading just above this sentence, in fact. In short, the secret to long-term investment success in time in the market, and not timing the market.
And as sayings go, there’s a lot of truth in it. Because even for people who reckon to be good at it, it’s extraordinarily difficult to correctly call the market’s twists and turns, and rises and falls.
And yes, I’m rubbish at that as well.
When I bought into an S&P 500 index tracker just over a year ago, for instance, I’d no idea that the already heady American stock market was going to motor on to deliver a 27% return. And when I sold out of China at the New Year — banking some decent gains in the process — I’d no idea that the Chinese stock market would rise a further 30%.
Similarly, when I bought GKN in 2010, I’d no idea that it would deliver a 144% return (excluding dividends), or that 2013’s purchase of a chunk of High Street bakery chain Greggs would deliver a meteoric 160% return — again, excluding dividends.
All of these things looked unlikely at the time, and certainly weren’t what I was expecting.
Be in it for the long haul
Which doesn’t really matter, thanks to the investing edge that I reckon I do have. Which is patience.
That’s right: patience.
Because I don’t go into investments expecting heady gains. At least, not in timescales measured in a handful of years. It’s great when it happens, of course. But as I wasn’t expecting it, I can hardly claim any credit.
What I can claim credit for is spotting what I consider to be undervalued companies — and markets — and buying into them. And then waiting, patiently, for that hidden intrinsic value to ‘out’.
Which it usually does. Although not always, of course.
Decent companies, at decent prices
Now let’s be clear. I’m not making big bold bets on investing minnows — the sort of stocks you often find on London’s AIM market, for instance. Those, I leave for others.
Nor am I buying into what are euphemistically called ‘special situations’. Again, I leave those to others, although I’m not averse to buying into an investment fund which claims to be good at spotting (and profiting from) such situations.
Nor am I buying what might be called ‘extreme value’ shares — such as BP, right after the Gulf of Mexico oil well blowout, for instance.
So what am I doing?
That’s easy. I’m buying what I think are modest stakes in well-managed businesses, which — for a variety of reasons — look temporarily cheap.
Last week I topped up on Royal Dutch Shell, for instance. Earlier in the year I bought into specialist engineering group Fenner, which has been hit by the mining slump. Last summer, GlaxoSmithKline looked cheap.
And so on, and so on.
And here comes the edge. Once bought, I don’t watch over the shares like a hawk, ready to sell on the slightest bit of bad news. In fact, after I’ve bought them, many such shares get even cheaper, before recovering.
Which is fine, because I’m in it for the long run, and I know that the odds are good that these shares’ fortunes will eventually turn.
And I can be patient enough to wait while that happens. But can you?
Yes, we're in it for the long haul here at the Motley Fool, and we focus on investing in great businesses for years rather than months. It's over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.
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Malcolm owns shares in BP, Royal Dutch Shell, Fenner, GKN, Greggs and GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.