Simplicity isn’t just a visual style. It’s not just minimalism or the absence of clutter. To be truly simple you have to go really deep.
Jonathan Ive, designer at Apple Inc.
The world of finance and investing is wildly complex, especially to the outsider. It’s loaded with sophisticated sounding jargon and products are sold by clever salesmen. After studying investment for many years I’ve arrived at five simple, common sense guidelines that may seem obvious. But it’s only by understanding the complexity of the investment world that private investors can have the confidence to keep their strategy simple and profitable.
I’ve worked in the investment industry – investment banking and financial publishing – for 20 years. During that time I’ve talked in depth with hundreds, maybe thousands, of finance professionals, mainly in the world’s financial centres of London, New York, Chicago, Zurich, Hong Kong and Tokyo. I’ve read a great many books about investing. I’ve immersed myself in dry, academic papers about investment strategies and how the global money system works.
I’ve spent months in classrooms to learn complex financial mathematics, and analysis techniques used to value companies and stock market indices. I’ve had long, in-depth discussions with “quants” about highly technical aspects of financial theory that have sometimes left my head spinning.
More usefully, I’ve studied economic and investment history. The aim has been, and continues to be, to try to learn what has caused bubbles and busts in the past. That way I’ve gained insight into how people survived and even thrived during periods of political and economic turmoil.
…I’ve learnt from those mistakes. Nothing concentrates the mind more than actually losing your own money.
Perhaps most importantly I’ve always managed my own investments. I’ve enjoyed many successes but also made plenty of mistakes along the way. The good news is that I’ve learnt from those mistakes. Nothing concentrates the mind more than actually losing your own money.
I expect to expand my knowledge and experience even further in future. That’s what I love about the field of investment, fellow OfWealthers. Being a successful investor is a constant learning process. But in the meantime my aim is to share what I’ve learnt so far, and what I continue to learn along the way.
It’s only by immersing myself into the complexities of the investment world that I’ve been able to develop, over time, a simple and coherent investment strategy. This strategy is specifically designed to maximise the chances of success for private investors like you and I.
Only by knowing a great deal about how it all works can I have the confidence to discard the irrelevant or misleading, and to focus on what really works.
What’s left is made up of five individual parts that are easy to understand on their own. Also, just as importantly, they highly complementary to each other, fitting together to create a coherent overall strategy.
Without this level of knowledge and years of experience I would constantly be tempted to follow more complex strategies or to buy fancy sounding new investment products. This is what most people do, and they pay the price for it.
When you see what I’ve arrived at you’ll realise that most of it is actually just common sense (something which is deeply underrated by far too many people). So you’d be forgiven for thinking that my quest was all in vain.
But to reiterate: it’s only by studying the confusing complexity of the investment world, in great depth, that I can have the courage to ignore the pressures of following complex, expensive and loss making strategies.
Five simple things every investor must do
I’ve come up with five simple guidelines that I believe are essential for any private investor:
- Diversify: Never put too much of your wealth into one single investment or asset class, however much you may like it.
- Be highly selective: Only invest in asset classes that are set to benefit from long term trends.
- Seek value: Only buy assets when they are reasonably priced, or downright cheap. The cheaper the better.
- Do little: Do as few transactions as possible, in order to keep costs down, by investing for the long term. Do nothing if you can’t find attractively priced investment opportunities.
- Keep it simple: Only invest in things you understand, and in simple financial products that have relatively low costs.
That’s the list. Now let me expand on what it means.
Diversifying your investments seems obvious. But it’s amazing how often people forget this simple principle of not putting all your eggs into one basket.
I have friends that lost 80% of their pension funds after the dot com technology bubble crashed in 2000, because they had gone “all in” on technology.
…everyone should own some gold, but I would never advocate putting almost all your money into it, or into any one thing.
And in 2011 many people recommended that I put 80% of my money into silver and gold, they were so sure that the dollar and other currencies would collapse. Since their 2011 price peaks the US dollar price of silver is down 55% and the price of gold is down 30%. I strongly believe everyone should own some gold, but I would never advocate putting almost all your money into it, or into any one thing.
It doesn’t matter how convinced you are of the potential for any single investment. You should NEVER put too much money into one thing.
That said, you shouldn’t diversify just for the sake of it. The standard investment advice from a financial advisor is to split your financial investments between shares (stocks) and bonds.
But if stocks are expensive then why not wait until they become cheaper? And if bonds have been in a 30+ year bull market (as they have been in most developed countries), and pay a pathetic interest yield today, why do you think they will be good long term investments?
So you should only stick to things that make sense in their own right. Just make sure you find enough of them to keep diversified.
Seeking value seems obvious too. Surely, buying things when they are historically cheap is likely to result in higher profits than buying things when they are historically expensive?
You wouldn’t buy a new car if it was 50% more expensive than competing models. You’d do better to find the dealer that was offering a big discount.
But, when it comes to investing, few people have the willpower to follow this discipline rigorously. I strongly urge you to be one of those that does.
There’s a wealth of historical evidence that investing in stock markets when the P/E ratio is low has resulted in the biggest profits over the following years. (For more information on P/E ratio download for free The Wealth Workout Report).
But this is a simple principle that a great many don’t seem to understand, or just forget in the heat of the moment. As a result they get sucked into overpaying for whatever is fashionable at the time.
So you need to be prepared to go against the crowd if you want to find value. Then you need to stick with it, which I admit can be psychologically challenging. But it really, really works as an investment strategy.
Doing as little as possible is essential too. Every trade has a cost, and if you trade too much then the costs really add up, which severely reduces your profits. The good news is that value investing naturally lends itself to doing little. You usually have to wait several years for value investments to really pay off, meaning you don’t trade them often.
And if you can’t find attractive investments then it’s best to just do nothing. There’s enormous pressure in this world of news overload to always do something. Ignore that pressure if you can’t find attractive bargains, and wait for a better time.
…Only invest in things you can understand, and avoid things you can’t.
Finally keep it simple. Only invest in things you can understand, and avoid things you can’t. For this reason I tend to avoid technology shares. I simply don’t have the skills to decide if a company’s products will be successful.
Even if I could pick successful technologies, this sector changes so fast that yesterday’s winner can be obsolete in a very short time. I’d much prefer to invest in companies that provide basic and essential goods and services, especially when I can buy their shares cheaply.
One good example – and there are many – that illustrates the risk of complexity is the BlackBerry phone. The company that makes it was once wildly successful, because it was producing a ground breaking gadget that allowed mobile email for the first time. It was a stock market darling.
But just recently the company reported an annual loss of $5.9 billion for the year ended 1 March 2014, after losing $646 million in the previous year. The share price peaked at $145 in 2008 but now trades at $8.60. That’s a loss of 94% that is highly unlikely to ever be recovered.
You should also stick to simple financial products for the most part, since they tend to have much lower fees. So, when investing in funds of stocks and shares, go for low cost exchange traded funds (ETFs), which typically charge annual fees between 0.1% and 0.4%.
On the other hand, don’t invest in high cost structured products (derivatives), hedge funds and private equity funds, which can charge as much as 5% a year. That is, unless your mission is to make fund managers wealthy. These products are designed to sound sophisticated, purely so they can charge higher fees to their unsuspecting customers.
In the end, like most things, investing comes down to common sense. It seems highly complex, but years of experience has taught me that it doesn’t have to be.
By following my five simple strategy guidelines, fellow OfWealthers, you will radically improve your chances of investment success.
Stay tuned OfWealthers,