Three core principles for investing
I’ve been urged to write content to ensure our clients know how much I know and to let people out there know that I know something about offshore investing.
I resist writing content, because there is already so much out there, written by so many savvy investors. Maybe at best, I can steer you to some authors or articles to remind you of some of the principles like Bernstein (article 1 & article 2) and anything by Buffet. I might post more when I come across them.
The problem with investing is that it is really quite simple but actually very difficult to implement (in terms of behaviour). Other than making an assessment of a company, versus the cost of taking a stake (its share price), there are only a handful of principles to keep in mind.
Of course there is a whole industry of analysis, forecasting and opinion around which stocks, shares, themes and countries are going to make you the most money. Everyone and every expert, myself included, has a valid, yet different opinion, which is what makes the market and provides the (share) price. It’s hard to ignore the noise.
The first principle is time invested. If what you chose to invest in is decent (by decent I mean either well managed or in a good business that grows profit), the price will eventually go up, but you won’t know when. Time invested also allows for returns to compound, which is mathematically (and I’m no mathematician) exponential. This is also why high fees can so markedly impact returns negatively.
The second principle is diversification. If you hold one share you don’t want to get it wrong. If you hold 3,000 you will get the “market return”, which might be good enough. Diversification benefits tend to diminish after holding more than 20 shares. What’s often over-looked in diversifying is understanding what you are actually holding. A portfolio of 30 technology shares isn’t that diversified, other than being diversified within the technology sector.
A third important aspect of investing to come to grips with is that by and large, all investments are either investments in shares in public companies (a share of the company’s profit) or in bonds (lending to the company for a fixed rate of interest). There are others like property, cash and private equity and tools such as derivatives. No matter how you invest; in a mutual fund, tracker , ETF and direct portfolio – you are really just accessing shares and bonds in different ways, but the return you get is going to be derived from the performance of the share price, the dividend and bond coupons and nothing else! Derivates, active management, ETFs are merely approaches to acquiring and holding shares and bonds and will give you a particular exposure, at certain times. Best you understand your exposure; what shares and other assets you are actually holding.