One of the hardest parts of investing is knowing where to start.
Do you want dividends or capital growth? Big companies or small? Commonwealth Bank of Australia (ASX: CBA) or National Australia Bank Ltd. (ASX: NAB)?
As legendary investor Howard Marks says: it's not easy.
Index funds are one quick solution to the problem. But another is to start investing slowly and adopt some basic principles to guide your investing decisions.
My own principles have become a valuable foundation for how I think about businesses and (mostly!) prevent me from making emotionally charged decisions when I'm feeling greedy or fearful.
There are three simple principles I follow for investing:
1. "Make your portfolio reflect your best vision for our future"
I have adopted this quote from Motley Fool co-founder David Gardener as a guiding principle for my investing.
It forces me to think about how the world might look in 5, 10 or 15 years' time and to consider how a particular company fits into that view of the world.
For example, cloud business platform Xero Limited (ASX: XRO) is a business I see as having the long-term potential to massively enrich the way small businesses operate around the world.
Similarly, I think that people will increasingly need the types of blood-products produced by CSL Limited (ASX: CSL) in the years to come.
2. Own companies with a long-term, sustainable advantage
Without a sustainable competitive advantage, a company can't win business from competitors, can't dominate in its market and can't compound at above-average returns for its owners.
This is a problem I see facing FlexiGroup Limited (ASX: FXL) as it scrambles to hold market share in the face of new online part-payment competitors like Afterpay Touch Group Ltd (ASX: APT).
3. "Compound your face off!"
In my experience compounding returns over time is the only investing secret there is to know so I love this aggressive quote by author and Portfolio Manager Wes Gray.
It reminds me to reinvest my dividends, hold on through market cycles and let my winners run.
It takes time to narrow down the principles that work best for you, but you can significantly speed up the process by reading widely. This will quickly identify the types of companies and investors you can closely relate to helping build your own principles.
