When you sit back and really take in what all the top investors around the world recommend, it's amazing how similar they are. The best long-term investors rely on a few simple principles:
- Buy under market value
- Buy only quality companies
- Avoid speculative bets on tiny companies
- Do the opposite of the crowd
These principles are common to Foolish-style investors including Warren Buffett, Peter Lynch, and even some of the disruptors like Carl Icahn. We've discussed these principles at length before, but it's worth recapping on the rules the experts use on a day-to-day basis:
#1: Understand the difference between speculation and investing
Only invest in a company if it passes your benchmark of value. This could include a combination of price to earnings ratio, earnings growth rate, intrinsic value, or any other metric, however the most important thing is that a company is compared to these metrics before buying. In this way an investor can measure his or her success based on the suitability of these metrics.
The way that far too many people lose money in the share market is by buying a handful of micro-cap stocks that uncle Bob thinks will go ok, but all too often turn out to be duds (this is speculating). A good example is Lynas Corporation Limited (ASX: LYC).
#2: Understand the difference between value and market momentum
This follows from point 4 above. If a company is on 'sale' then buy some shares (based on your perception of value), however if it is well above the price that you consider to be the value of the company, be cautious.
The market may push up the share price of a popular company like Qantas Airways Limited (ASX: QAN), but that doesn't necessarily make it a great investment at the current price.
# 3: Understand the difference between information and knowledge
The professionals note that it's becoming increasingly difficult to achieve an unbiased view on a company due to the endless amounts of analysis written every day. Large-cap companies like BHP Billiton Limited (ASX: BHP) have so much research written about them that it's worth spending even more time researching to gather your own view.
# 4: Understand the difference between perception and reality
"This time will be different" has proven to be wrong nearly as many times as it's been said. Market commentators have a great ability to influence the masses so be careful of values based on 'new' metrics which are expensive compared to companies valued using 'old' metrics.
The end result, as many will be aware, is that many of these companies crash into oblivion during times like the tech boom, but the companies in value using the 'old' metrics are still around today. Consider the staying power of massive names like CSL Limited (ASX: CSL), Brambles Limited (ASX: BXB) or Amcor Limited (ASX: AMC).
Time is the problem
At the end of the day though, many investors just don't have the time to do this type of research. The Motley Fool can help! Here's an example of what we can provide to time-poor investors:
