Fundamentals of Successful Investors
“It's all about net worth. Stop thinking about buying a stock or a fund, or growing your stocks or funds as the only way to success. For most people, the true real measure of financial success, the kind that leads to achieving the lifestyle and legacy you want, is net worth.
“We believe all financial decisions should be considered from an overall net worth point of view, which means debt repayment is as important as adding to assets. History is littered with evidence that there are times for adding to different asset classes, and times to pay down liabilities. Always measure yourself annually, using net worth as the most important benchmark. The road to financial success is clear when one measures net worth, and knows how to use it to make decisions.
“Know the difference between speculating and investing. Too much guesswork continues to be passed along as professional advice and it is critical to know the difference. Speculation is the hope and luck that an investment moves in your favour. Investing is the protection of capital with a reasonable rate of return from a business that has been proven for many decades and through many business cycles. Remember that every stock, big or small, has a great story to promote, yet few actually move on to success over time.
“Understand the common sense of risk/reward. If an investment could potentially rise by 20% under normal conditions, but has a downside risk of 80%, this is a poor risk/reward ratio. It is important to find investment opportunities that offer a reasonable expectation of upside over the long term, with very little downside risk. Look for 50%+ upside over five years or longer, with only 10% downside risk. Always seriously consider the downside of an investment before committing funds. Everything has risk to some degree and that needs to be evaluated against three main criteria: a) your personal risk profile and time frame, b) a recessionary business cycle, and c) potential for insolvency.
“Not everything moves in the same direction, at the same time, and to the same degree. Proper diversification means that a portfolio is assured to have individual investments that do better than others in a given year. Stop selling the lower performers, to add more to the over performers, this is a flawed approach to investing. Understand that certain investments may not change share value for many years, and can then double in one year.
“Place more emphasis on dividends. There is undebatable statistical evidence that dividend paying stocks, and in particular dividend growth, has historically produced a significantly higher rate of return than traditional stock trading.
Create a personalized financial plan. It is critical to know where you want to be, and how you will get there, prior to investing. Determining asset mix, risk profile, time frame and appropriate security selection are all critical elements determined as one undertakes the formulation of a financial plan. The portfolio must be consistent with the objectives in your financial plan.
“Selling. Every successful investor since the dawn of time will tell you that selling is much more difficult than buying. Have a discipline. If you are a trader, be a trader and do not deviate from your principles and rules, regardless of gain/(loss) status. If you are a fundamental investor, stick to the fundamentals and only sell in extreme overvaluation, or fundamentals breakdown, regardless of gain/(loss) status. Never be emotionally afraid of selling at a loss. Hanging on to a loser is a big mistake.
“Tax. There is no doubt that tax plays a role in investment management and financial planning, but it is not the sole driver of all decision making. There is a healthy influence that tax planning should have in the investment management process. First and foremost, it is important to understand that security selection is always done according to your objectives, time frame and risk profile. Tax issues are unique to each person and play a significant role in influencing what types of securities are held in certain types of accounts. For over two decades, I have witnessed monumental mistakes by investors who put tax issues before investment merits, and this has always proven to be a big mistake.”
