Top 5 New Year’s Resolutions for Your Investments
A common myth about investing is that to be successful you have to possess superior insight into the market. It may be true that successful investors sometimes possess market insights. However, you can’t hope to forge a successful investment career by insight alone. The truth is that successful investors build BETTER portfolios than everyone else.
In the spirit of the season, we will give you our New Year’s Resolutions for our stock portfolios:
1) Invest Only in US Stocks
Don’t be surprised. Investing in emerging market equities in countries like Russia and China carries many political risks (not just economic). It’s a challenge to predict the risks, and they can wipe out your portfolio completely (ask investors in Russian ADRs).
So, if we have to avoid emerging markets entirely, should we avoid ALL foreign markets?
The answer is quite simple. Let’s take ADIDAS and NIKE. Most investors and consumers believe these companies to be rivals, which is of course the case. One of the most significant differences between them is upper management salaries. NIKE pays its executive officers nearly TEN times more than ADIDAS.
How has that translated into shareholder value?
Numbers show that over the past 20 years, NIKE has returned 1000% while ADIDAS 500%. Sometimes the difference in shareholder returns is 3—4 times higher over a period of 20 years. ADIDAS is actually a very well-run company.
2) Invest Only/Primarily in ETFs
Many new investors come to the stock market after acquiring an MBA or CFA in finance. Such programmes set people up for a career in investing. Nevertheless, degrees alone are far from being enough! An MBA or CFA is like having a degree in shadow boxing — you think you move and punch like Mike Tyson, but that is usually an illusion.
REALISTIC individual stock valuations take a lot more time and effort. As a rule of thumb, it takes one year to learn one stock well. You can take shortcuts but NOT in the first five years. It might take you 40 years of experience to build a universe of 50—60 familiar investment stocks. Until then you need to diversify your portfolio, and the best and cheapest way to achieve it is by investing only/primarily in ETFs.
3) Avoid Market Timing, Just Average
There are plenty of supposedly successful investors who tell fabulous stories of how they shorted the market right before it dropped significantly. Or bought it straight before it rose. Even if those stories are true, you can’t hope for a long and successful career in investing by trying to time the market. Most successful investors AVERAGE their entries and exits. They don’t care if the average is up or down – just average.
4) Don’t Use Leverage
People try to time the market because they want to use leverage. True, leverage has its uses and CAN augment returns. However, in the long run, using leverage can impact your portfolio negatively. If a portfolio loses 10%, a subsequent rise of 10% in value will give you a breakeven. If a portfolio drops by 50% in value, it needs to rise by 100% to get back to breakeven.
5) Just Return the Ball
To borrow from Howard Marks, ‘Professional investing is like amateur tennis — all you need to do is return the ball.’
Professional investing holds stories of many ruined careers where people tried to produce EXTRAORDINARY returns. Warren Buffett outperformed the markets on average by 4% a year throughout his career, and he has a net worth is 100 Bln USD. Beating the markets in the long run over a period of 20 or 30 years is something so rare that if you manage to achieve it, you’ll become a BILLIONAIRE.
Trying to produce a consistent 20% on average annual return in ANY publicly traded securities has NEVER been verifiably achieved! Most professional investors end up underperforming the markets because they try to outperform them by a significant margin.
Don’t be a hero, and don’t try to think you know what will happen — follow ALL the resolutions!