Focus On High-Quality Companies
While many investors view Jesse Livermore as little more than a gambler whose fortune was built on luck, his central idea of selecting the best company in a sector is very sound advice. In fact, Warren Buffett adopts a similar mentality when choosing which stocks to add to his portfolio, with him famously having said that he’d rather buy a great company at a fair price, than a fair company at a great price.
So, how do you assess which company is the best within a sector? Of course, it is highly subjective, but focusing on things such as financial standing, regional diversity, track record of growth and forecasts for the next couple of years are all highly useful means of judging whether a company is great, or just fair.
For example, if a company has only a modestly leveraged balance sheet, excellent cash flow, products that command high levels of customer loyalty in numerous regions across the globe, and is expected to beat the wider index’s growth rate over the medium to long term, then it could prove to be a sound investment.
Buy At A Sensible Price
Of course, the word ‘sensible’ is also highly subjective. What one person considers ‘sensible’, another may find too expensive or even dirt cheap. However, the key takeaway is that there tend to be two types of investors.
The first (and most common) are those that want to buy more shares in a company the higher its price goes. This is counterintuitive, since the idea of investing is to buy low and sell high, but a herd mentality appears to take over which makes people more interested in stocks with strong past performance.
The second are those investors who always want a lower price, and who spend many months and years sitting on the side-line. This may mean that losses are reduced (since no investment is made) but it also means there is no reward either.
As such, buying at a price that is ‘sensible’ means buying at a price that, while not necessarily at the bottom, leaves scope for realistic capital gains in the long run.
Be Patient
It is amazing how many investors give their shares a year or two (at most) to perform before selling up and moving on to something else. This is highly unlikely to lead to anything more than frustration and higher dealing costs, since it can take many years for investment returns to become really attractive.
That’s because the business world moves at a relatively slow pace. Certainly, technology is always changing and improving, but most of us invest only a small proportion of our money in tech stocks, and so must accept that sectors such as banking, health care, mining, consumer goods and many others move at a very slow pace.
Certainly, the idea of trading stocks on a daily basis and making enough money to sit on a beach for the rest of your life is a very appealing one. The reality, though, is that it will take time to make enough money from your investments to be able to retire. Buying and selling shares more frequently is likely to prolong your wait.