Neil Woodford is one of the best known and most successful investors of all time. Clearly, it’s impossible for anyone to invest exactly how Neil Woodford does, but it is possible for all investors to learn from him and adopt a similar style. Here are three steps to help you do just that.
Time
While buying and selling shares can be exciting, the reality is that buying and holding on to stocks is likely to provide a superior risk/return ratio. That’s because attempting to buy low and sell high is difficult, since shorter-term share price movements are hard to predict. For example, you may select a company that has excellent prospects but if the wider industry experiences a difficult period it may take time for that company to come good. Similarly, selling a share just because it’s in profit may lead you to miss out on further gains.
Investors such as Neil Woodford tend to find companies they like and stick with them for the long term. This allows changes to management strategy and new products to have a full and significant impact upon their profitability and share price. After all, shares are small pieces of a real business and the business world moves much slower than many investors realise.
Dividends
One area where Neil Woodford has specialised in his career is dividends. Various pieces of research have shown that the majority of returns in the long run are derived from the reinvestment of dividends, rather than from capital growth. As such, dividends are worth focusing on – especially at a time when interest rates are falling and there’s a lack of income return available in other asset classes.
Dividends also provide information on management’s view of a company’s future. While this may be inaccurate, it nevertheless provides an indication of management’s confidence in the company’s upcoming financial performance. In addition, dividend stocks are usually seen as more defensive companies and so may provide a degree of protection against falling share prices in the wider market.
Conviction
While diversification is important for all investors, so too is having conviction. It’s easy to spread the risk among a number of different sectors and stocks, but ultimately if you wish to achieve superior total returns to the wider index then you must back your judgment on specific stocks and sectors. That’s not to say that a portfolio should be overly concentrated on a small number of stocks and sectors, but rather that as an investor you should invest where you feel comfortable and where you think you have a competitive advantage.
For Neil Woodford, this has centred on tobacco and healthcare. Although they’ve provided him with excellent returns, he’s actually said that his biggest investing mistake was to underinvest in both sectors. Therefore, it’s clear that as well as being a top-notch investor, Neil Woodford is only human too.