Rules for investment success

I can summarize my message by recalling the famous advice of Will Rogers.

“Don’t gamble,” he said. “Buy some good stock. Hold it until it goes up… and then sell it. If it doesn’t grow, don’t buy it!”

There is as much wisdom as humor in this remark. Success in the stock market is based on the principle of buying low and selling high.

Granted, anyone can make money by reversing orders – selling more and then buying less.

And those strange creatures, options and futures to make money.

But, by and large, these techniques are for traders and speculators, not investors.

And I’m writing as a professional investor who has had some success as an investment advisor over the past half century – and wants to share the lessons I’ve learned along the way with others.

The article first appeared in 1993 in World Monitor: The Christian Science Monitor Monthly, which is no longer published, and is reprinted with the permission of the late Sir John Templeton.

Although the market and financial data covered in this 1993 article are clearly out of date, Sir John Templeton’s core investment principles are still relevant.

Invest for maximum total real return

This means the return on an invested dollar after taxes and inflation.

This is the only rational objective for most long-term investors.

Any investment strategy that fails to recognize the insidious effects of taxes and inflation fails to recognize the true nature of the investment environment and is severely handicapped by it.

It is imperative that you protect your purchasing power.

One of the biggest mistakes people make is putting too much money into fixed-income securities.

Today’s dollar buys 35 cents in the mid-1970s, 21 cents in the 1960s, and 15 cents after World War II. US consumer prices have risen over the past 38 years.

If inflation averages 4%, that will reduce the purchasing power of a $100,000 portfolio to $68,000 in just 10 years.

In other words, to maintain the same purchasing power, that portfolio would have to grow to $147,000 — a 47% gain in just over a decade. And this doesn’t even count taxes.

“Bring variety. In stocks and bonds, like many other things, there is safety in numbers.”

Investment – ​​Do not trade or speculate

The stock market isn’t a casino, but if you move a point or two every time a stock moves, or if you consistently sell short…

Or if only trading in options…or trading in futures…the market will be your casino. . And, like most gambles, you may eventually—or often—lose.

You may find your profits eaten up by commissions.

Despite all your careful calculations and short selling, you will find a market that you expect to turn up and up and up.

Every time the Wall Street news announcer says, “It’s just in,” your heart will stop.

Remember the wise words of Wall Street legend Lucian Hooper:

“What always impresses me,” he wrote, “is how well relaxed, long-term owners of stocks do with their portfolios compared to their switching traders.

An inventory, relaxed investor is generally better informed and has a greater understanding of essential values; He is more patient and less emotional;

He pays a small capital gains tax; He does not charge unnecessary brokerage commissions; And he avoids acting like Cassius by ‘thinking too much’.

Be flexible and open-minded about investment options

Blue Chip Stocks, Cyclical Stocks, Corporate Bonds, U.S. Time to buy treasury instruments etc.

And there is time to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.

The fact is that there is no investment that is always the best.

If a particular industry or security type becomes popular with investors, that popularity will always prove temporary and—when lost—will not return for many years.

Having said that, I should note that, for a long time, most of our clients’ money has been in common stocks.

A look at history will show why.

From January 1946 to June 1991, the Dow Jones Industrial Average rose by an annual average of 11.4% – including reinvestment of dividends but not counting taxes – compared to an average annual inflation rate of 4.4%.

If the Dow had only kept pace with inflation, it would be around 1,400 right now instead of 3,000, a number that seemed extreme just 10 years ago, when I calculated that it was a very realistic possibility on the horizon.

See also Standard & Poor’s (S&P) 500 stock index.

From the early 1950s to the late 1980s—a total of four decades—the S&P 500 rose at an average rate of 12.5%, compared with 4.3% for inflation, 4.8% for US Treasury bonds, 5.2% for Treasury bills and 5.4% for high-grade corporate bonds.

In fact, the S&P 500 beat inflation, Treasury bills and corporate bonds in every decade except the 70s, and beat Treasury bonds – considered the safest of all investments – in all four decades.

I repeat: There is no real security without saving purchasing power.

Buy less

Of course, you say, it’s obvious. Well, it could be, but that’s not the way the market works.

When prices are high, many investors buy many stocks.

Prices are low when demand is low. Investors have pulled back, people are frustrated and pessimistic.

When almost everyone is pessimistic at the same time, the entire market crashes.

Often, only stocks fall in certain areas. Industries such as automaking and casualty insurance go through regular cycles.

Sometimes stocks of companies such as thrift institutions or money-center banks become all-time favorites.

Whatever the reason, investors are on the sidelines, sitting on their wallets.

Yes, they tell you: “Buy low, sell high.” But many of them overbought and undersold.

Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable view.”

It’s stupid, but it’s human nature. It’s extremely difficult to go against the crowd—buying when everyone else is selling or has sold.

Buying when things look darkest, when many experts tell you that stocks in general, or in this particular industry or even this particular company, are dangerous right now.

But, if you buy the same securities that everyone else is buying, you will get the same results as everyone else.

By definition, if you buy the market, you cannot beat the market. And chances are, if you buy what everyone else is buying, you’ll do so at an already high price.

Heed the words of Benjamin Graham, the great pioneer of stock analysis: “Buy when most people…including experts…are pessimistic and sell when they are actively optimistic.”

Bernard Baruch, an adviser to the president, was even more succinct: “Never follow the crowd.”

So simple in concept. So difficult to implement.

When buying stocks, look for bargains in quality stocks

Quality is a company that is a sales leader in a growing market.

Merit is a company that is a technological leader in a sector that relies on technological innovation. Quality is a strong management team with a proven track record.

Quality is a well capitalized company that is the first company in a new market. Quality is a well-known trusted brand for high-profit-margin consumer products.

Obviously, you cannot consider these quality attributes in isolation.

For example, a company may be a low-cost producer, but it is not a quality stock if its product is unpopular with consumers.

Similarly, being a technical leader in a technology sector means little without adequate capital for expansion and marketing.

Determining quality in stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but you want it to be great before it gets three or four stars.

When buying stocks, look for buying value in quality stocks, not market trends or economic outlook

A savvy investor knows that the stock market is really just a stock market.

Individual stocks may be pulled momentarily by a strong bull market, but ultimately the individual stocks determine the market, not the other way around.

All too many investors focus on the market trend or economic outlook.

But individual stocks can rise in bear markets and fall in bull markets.

Stock markets and economies don’t always move in lock step.

Bear markets don’t always coincide with recessions, and an overall decline in corporate earnings doesn’t necessarily lead to a simultaneous decline in stock prices.

So buy individual stocks, not market trends or economic outlooks.

Diversity. In stocks and bonds, as in many other things, there is safety in numbers

No matter how careful you are, you cannot predict or control the future.

A hurricane or earthquake, an attack on a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars.

Then, even a well-run company can have serious internal problems that weren’t apparent when you bought the stock.

So you diversify—by industry, by risk, and by country.

For example, if you search around the world, you’ll find more deals—and possibly better deals—than in any single nation.

Do your homework or hire a knowledgeable expert to help you

People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.

Remember, in most cases, you are either buying an income or an asset.

In free-enterprise nations, earnings and assets together exert a large influence on most stock prices.

Earnings on stock market indexes—the fabled Dow Jones Industrials, for example—fluctuate around the replacement book value of the index’s shares.

If you expect the company to grow and prosper, you are buying future earnings.

As you expect earnings to rise and most stocks are valued on future earnings, you can expect the stock price to rise as well.

If you expect a company to be acquired or dissolved at a premium above its market value, you may be buying an asset.

Years ago Forbes regularly published lists of these so-called “loaded laggards”. But remember, there are very few of these companies today.

Raiders have entered the market in the last 10 to 15 years: Be very suspicious of anything they leave behind.

Aggressively monitor your investments

Anticipate and react to change. No bull market lasts forever. No bear market lasts forever.

And there are no stocks you can buy and forget. The pace of change is enormous. As Hooper points out, being comfortable does not mean being complacent.

For example, consider just 30 issues involving the Dow Jones Industrials.

From 1978 to 1990, one out of every three issues changed because the company was downsizing, or was acquired, or went private, or went bankrupt.

Check out Fortune magazine’s list of the 100 largest industries. In just seven years, from 1983 to 1990, 30 people dropped from the list.

They merged with another giant, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business.

Remember, no investment is permanent.

don’t be afraid

Sometimes you don’t sell when everyone else is buying and you get caught up in a market crash like we had in 1987.

There you will suffer 15% damage in a single day. maybe more. Don’t rush to sell the next day.

The time to sell is before the crash, not after. Instead, study your portfolio.

If you don’t own these stocks now, will you buy them after the market crashes? Chances are you will.

So the only reason to sell them now is to buy other, more attractive stocks.

If you can’t find a more attractive stock, hold on to what you have.

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