For over six years, I worked at Wall Street Survivor, first as basically an intern and eventually running our marketing and product development departments. We grew to become the web’s most popular stock market education platform helping hundred’s of thousands of investors learn about the stock market.
However, when I started 6+ years ago, I knew very little about the stock market. And while I’m clearly still not an expert, I’ve spent a ton of time learning about portfolio strategies and watching how others on the platform were able to succeed.
Over the summer, I sat down with Andrew Sather of einvestingforbeginners.com to talk about WSS and investing in general.
With some time in the rearview mirror, I’ve spent a little more time thinking about investment strategies that make sense to me. Here they are — broken down (coincidently) into Warren Buffett cliches.
1. Diversification is a protection against ignorance.
When I first started buying stocks for my portfolio, I thought I needed to build the most diverse portfolio possible to reduce my risk. I thought of it as a checklist. Tech stock, check. Energy stock, check. Small-cap stock, check…etc.
The truth is (and I think this is true for a large number of people) I don’t know a whole lot about a lot of things. And there’s nothing wrong with that. For example, I know next to nothing about energy, pharmaceuticals, commodities… so why would I invest my money in those categories?
The market moves on information, and if you’re not,
a. first to get that information, or
b. first to correctly interpret and act on that information,
then you have no chance of beating the market. None.
Think of all the investors who got burned in the 2000 tech bubble who couldn’t find the URL bar, or investors in the 2008 financial collapse who didn’t understand sub-prime mortgage. Don’t be these people.
Instead of diversifying, I try to invest in companies in which I have a competitive advantage over the market. Case in point, because I live and breathe technology, that’s my competitive advantage. I can see trends faster than the general market. I understand business models that may seem complex to other investors. It’s no surprise then that 70% of my portfolio is made up of tech stocks. What’s your competitive advantage? What do you know better than everybody else?
2. It’s better to own a great company at a good price than a good company at a great price.
This seems like a subtle difference, but in reality it’s huge.
I try to focus less on stock price and on “technicals” and more on company fundamentals and industry trends. In fact, if possible, I attempt not to think about price at all. Instead, I try to think about how much value the company will create in the future. If you believe a business will create more valuable in the future, be it through innovation and new products, increasing sales etc, then the company will be more valuable in the future, simple as that. And whether you buy that company for a good price or an excellent price, you’ll likely make money in the long run.
For example, I own LinkedIn in my portfolio. I bought in at around $180 per share. I know that price is high, and that its PE ratio at 800+ is ridiculous. But despite that, I’m a proud and happy investor because I think the company will create more value through their Talent Solutions and Premium Subscription services in the future. And if the company continues to grow their earnings, then their PE ratio will adjust. I have no doubt that LinkedIn is a “great” company and I’m ok with paying a little more for it.
On the other hand, last April I really wanted to buy Tesla. I love their innovation, their progress and like everybody else I’m a huge fan of Iron Man (err, I mean Elon Musk). The stock was hanging around $50, and the thinking was that it was too expensive. I surveyed the office to see what other people thought. Some answers included “it seems expensive, it’s pushing its 52 week high” and “no way! It hit the 200 day moving average, it’s due for a reversal”. Putting all that jargon aside for a moment, I listened to their “technical” advice, and convinced myself that it was bad price, and didn’t buy it. Obviously, that was the wrong decision. Since then the stock price has tripled!
At the end of the day, the technicals told me it was a buy at $40 and a hold $50. Because I wouldn’t have gotten in at a “great price”, I missed out on a 200%+ gain.
So lesson learned, it’s better to own a great company at a not so good price than the alternative.
But that only works if…
3. My favorite holding period is forever (err at least a really long time).
Slightly adapted from a famous Warren Buffett quote. Investing for the short-term is for professional traders, institutions and people sitting in front of their trading accounts all day. I’ve learned that “day trading” is way too risky for people like me (and presumably you).
For me, over the short-term (months), the market is irrational and way to volatile. In the short-term, you lose money when there’s trouble in Egypt, corruption in Greece and oil spills in the Gulf of Mexico. But in the long run (years), that volatility smooths and events that captivate the markets and wreak havoc on your portfolio are long forgotten.
Check this out. Here’s the S&P 500 from September to December 2012:
A quick look at the graph above, and it looks like the market is beginning to tank. Some “traders” will look at this, panic and cut their short-term losses.
Here’s how that chart looks stretched out to 9 months rather than three.
Completely different picture, right? That short-term loss was temporary, and if you sold-off, you would have missed out on the next rally.
Ask any investor how to invest and 9 out of 10 of them will say something like buy low, sell high. Well I’ve found that proposition to be almost impossible in the short-term (months) but much easier in the long-term (years).