As we enter the new year, many people make resolutions to ditch their bad habits of the previous year in an effort to make better choices for the year ahead. To get the best results from our resolutions, it often comes down to making better choices with discipline to help us stay on track. Maintaining discipline and having key principles and guidelines in place is equally as important in investment decisions.
All too often, investors get complacent or to emotional and don’t remain disciplined in a good market, such as the one we are in now. It seems some investors’ instincts are to ditch a lot of the habits that made them successful when times were good. I would argue that given the length of this bull market, it is a very important time to make sure you are following a disciplined process. In an effort to help investors make wise choices, our team at Lorkovic Wealth Management of RBC Dominion Securities is sharing four key principles that we have learned from many of the best minds in investment – such as Warren Buffett and Howard Marks – and have applied in managing our clients’ hard-earned life savings.
You are buying companies, not stock tickers. In a world where we are inundated with information and constantly being pitched a better way to invest, it is important to remember you are buying shares in a company, which actually represents a level of ownership in that company – not just a stock ticker. This may sound basic, but when you think about it that way, you start to think longer term. You think more about the quality of the company and become less focused on the short-term price movements that you have no control over.
Own quality companies. Warren Buffett has a great quote: “Price is what you pay, value is what you get.” Once we recognize that the company we want to allocate capital to is a quality one, it’s only logical that you may pay a modest premium for a great business, as opposed to getting a modest discount on a mediocre business. Owning great businesses that deliver stable repeatable revenue growth and excellent management helps us and our clients sleep at night.
Be decisive. The world is paved with squirrels that couldn’t make a decision. To be a successful decision maker, you need to be confident in taking a firm stance and trust your process. There will be times when your neighbour tells you about a hot stock that seems to only go up – what they aren’t telling you is the other “hot stocks” they got wrong and how much money they lost on them. It is important to remember that you need to make money in good markets and have protection built into your process in down markets. After all, the more you protect on the way down, the more you will have when it goes up.
Buy low, sell high. Sounds easy, right? However, this seems hard for many individual investors. Investors are human: they get emotional, greedy and fearful. Because of this, there is a tremendous amount of opportunity for the investor that can maintain discipline. Prices of the companies you own will go up and down. When they are down and nothing has fundamentally changed with why you bought into the company in the first place, you need to buy more, not sell like the rest of the herd. This is also true when the company goes up and greed takes over. You can never go wrong with taking profits.