After reading Ed’s last article A practical guide to keeping losses small and in particle Ed’s response to a comment
“There are different approaches to the top of the mountain. What’s important is to find an approach that suits your psychology.”
I thought I would outline and share my approach and psychology and how I go about share investing, as with most things, we learn more off others and from doing. I have no issues with different investing strategies and don’t think one is more superior than the other, the real key is picking or developing a strategy the resonates with you.
First off, the stock market has traditionally been regarded as the riskiest asset class there is, but to date it has been the greatest wealth creation mechanism on the planet. So with this in mind, I see offense as the greatest form of defence and the best way to manage risk.
I almost see risk management and market movements as a moot point given the risks involved in the stock market and by focusing and contributing more time to finding companies that are fundamentally strong and can ride out the ups and downs and perform over the long-term; I’m working with the stock market trying to creating wealth rather than preserving it.
I subscribe to one of Warren Buffett’s great quotes:
“They say in the stock market, ‘Buy into a business that’s doing so well an idiot could run it, because sooner or later, one will,'”
This is not discounting that there are great founders and individuals out there that have created a lot of value for shareholders, but they are far and few between and only backing companies with a good jockey does narrow the pool of companies to invest in. I look at how a company has used debt, assets, and equity to fund the business and how much of profits have been paid out as dividends rather than being retained within the business, to see if the board are doing the right things and their interest align with shareholders.
It is difficult for a company to create value over the long-term if it pays majority of profits out as dividends and then uses equity, asset sales, debt to fund their operations. I like to see companies repay/reduce debt before paying or increasing dividends and/or retain a higher percentage…
