Wisdom of the masters

Invest in what you know

“Ultimately it is not the stock market or even the companies themselves that determine an investor’s fate. It’s the investor.”

— Peter Lynch, Stock market legend and fund manager who took Fidelity Magellan from $22 million in assets to $14 billion in little more than a decade.

 

 There’s no secret to being a successful investor. Common sense, patience and fortitude to not follow the crowd are shared characteristics of some of the greatest investors of the 20th century. There is a surprising consensus among them, and an even more surprising simplicity in what they have to say.

 

 Use your “common” sense

As Peter Lynch says: “Invest in what you know.”

Lynch is a firm believer in investors using their own “local” knowledge and common sense to alert them to potential investment opportunities. The average investor through his job, hobbies or personal interests is often in a good position to spot potential or emerging investment opportunities. At a deeper level, common sense means knowing why something is a good investment.

Quite simply, says the “Oracle of Omaha,” Berkshire Hathaway’s Warren Buffet: “I don’t buy a business I don’t understand.”

If any investment’s advantages and disadvantages cannot be easily and plainly explained, it may not be an investment at all, just a speculative leap of faith.

 

 Ignore market noise and be patient

Sir John Templeton, the founder of the Templeton Growth Fund once said, “Forty years of experience have taught me you can make money without ever knowing which way the market is going.”

Peter Lynch is of a similar mind: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” 

The daily volatility of recent markets reveals more about investor psychology than it does about the long-term value of your investment portfolio. Templeton, a contrarian by nature, considered daily media analysis and market volatility as noise that could safely be ignored.

  

 Set comfortable investment limits

Bernard Baruch, a renowned American statesman and speculator, once advised: “If your stocks are keeping you awake at night worrying about them, you should sell to a sleeping point.”

Know your risk tolerance and buy and sell accordingly. Investors often think they are supposed to be risk takers, but in fact, successful investing is a function of risk minimizing and looking for what Benjamin Graham called, “a margin of safety” in their investments. Informed speculation may have its place in a portfolio, but not to the point of sleepless nights.

 

 Establish a plan and stick to it

As Benjamin Graham once said: “Investment is most intelligent when it is most business-like.”

Many investors make their portfolio management an emotional experience. That’s not the way of the Masters. Know what you’re buying says Warren Buffet and why you’re buying it. And just as important, know when to sell. Ben Graham firmly believed that, “the investor should have a definite selling policy,” that is, a pre-identified price point when to take a profit or loss or a pre-established maximum holding period for each investment.

These investors were passionate about the stock market and the companies they invested in, but they remained coolly professional about how they managed themselves and their investment decision-making.

“The four most expensive words in the English language are, ‘This time it’s different.’”

— Sir John Templeton

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

— Warren Buffett

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

— Benjamin Graham

“I never lost money by turning a profit.”

— Bernard Baruch

  

Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only.  Securities are offered through Raymond James Ltd., member CIPF. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF.  For more information feel free to call Jim at (250) 594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.