vendredi 31 août 2018

10 advices to save a lot of time and a lot of money when you begin

I know that many ideas here have been written in the past. But it's a post that I plan to submit to Robin for his new book. You can follow Robin on Facebook via this link.


The hardest thing for new investors is to know where to invest.

What's a good company? What's a good CEO?

Both are very important, but, for beginners, they're both hard to evaluate.

We can't know these things instinctly. That's why most people follow the first person they can: A journalist on TV, on a website, on the radio, a workmate or a neighbour. And there's no warranty of quality.

Your duty as an individual investor is to seek autonomy as soon as possible. I know it sucks, because we like to make as little efforts as possible to get what we want. It's gonna take years, but my advice is to read about the stock market like you would read about another topic of interest: Rock and roll, movies, hockey, football, etc. You won't be good if you're not passionate about it. Nobody gets good at anything if they're not passionated about it.

If you don't get the autonomy I'm talking about, you'll be manipulated in a way or another. You'll read people trying to pump their penny stocks, which can be done easily if a moderate audience swallow everything they say. Or you'll buy the big names that analysts sponsored by big companies will try to sell you. These big names may not be bad picks, but they may not be great picks either.

You won't get that autonomy easily, so, if you find some people that look honest, stick with them for a while. There's not that many of these people in the investment world.

To help you a little, I have "5 never-invest rules" and "5 essential to invest rules".

Let's begin with the "5 never-invest rules": 

1- Never invest money on a stock where there's a lot of controversy;
2- Never invest money on a penny stock;
3- Never invest money in an industry which is declining;
4- Never invest money on natural resources; 
5- Never invest money on a company that carries too much debt (for instance, 50% of their market cap or more);

And here's my "5 essential to invest rules":

1- Search stocks with a beta lower than 1 (lower than the market) (precision: many people seem to think that this metric is useless but I believe in it)
2- An historical return on equity (ROE) over than 15, and, ideally, higher than 20;
3- A forward PE between 15 and 25 (of course, if you pay 25 times next year's earnings, the growth has to be exceptional and the historical PE of the stock must have always been high);
4- Annual EPS growth of at least 10% over the last 5 years;
5- A high predictability of earnings.

If you apply the "5 never invest rules" and the "5 essential to invest rules", I think that your chances of getting a great selection of stocks are high.  I can't imagine someone going bankrupt while applying these 10 rules on a 15-20 stocks portfolio. 

9 commentaires:

  1. Very interesting blog entry. This is something that keeps me up nights. A lot of times, I'll be reading some investing board and some kid will ask: should I buy penny stocks. It led me to an interesting challenge. I know there is no way in the world that I can impart enough knowledge to a beginner to make them successful. I doubt that many beginners will spend the hundreds or thousands of hours that we spend on investing. So, my challenge is this: HOW DO YOU IDIOT PROOF A BEGINNER'S PORTFOLIO SO THEY DO NOT LOSE THEIR SHIRTS BY MAKING EVERY MISTAKE IN THE BOOK?

    I finally brought it down to ONE COMMANDMENT to give the beginner a realistic chance of success: DO NOT BUY ANY STOCK GOING FOR LESS THAN $1,000 PER SHARE.
    Will this beginner miss out on many great stocks with this investing strategy? Of course. But he will also miss out on the many stocks that will ruin him.
    What would a portfolio of stocks trading over $1,000 per share look like? Well...

    1. Buy Berkshire (you can be forgiven for buying the B shares at $209 since most of us do not have $315,000 for one A share)
    2. Buy Google/alphabet, Markel, Amazon, Priceline (or whatever it's called today), and NVR.
    My thinking is that these six companies had to enjoy massive success for many years to get their shares so high and chances are they will keep succeeding.
    The other know-nothing strategy is to just buy the S&P 500 index.
    By the way, I get in trouble on some of these boards for using the term "Idiot proof" your investment. I'm sorry. I feel I must be very insulting to a beginner who thinks penny stocks are the way to go. I mean, I keep making stupid mistakes like buying mining companies or penny stocks (and I know better). There's no hope for these beginners who dream of quick riches with penny stocks if somebody does not crash their dreams hard.
    You want to give advice to these beginners? I'm reminded of a recent movie (a comedy) called Central Intelligence starring Dwayne "The Rock" Johnson. He plays a very muscular CIA agent who used to be an obese kid in high school. His old friend cannot believe the transformation when they run into each other 20 years later, and asks: what did you do to change your body so dramatically?
    He said: only one thing. I have worked out six hours per day every day for the last 20 years. That's the kind of advice I feel I have to I prefer to say: Buy the S&P 500. If they want to buy penny stocks, I say: only stocks going over $1,000 per share for you (at least for the next five years...THEN MAYBE you try to buy stocks going for less than $1,000 per share).
    One last consideration: what happens when investors KNOW what to do and not do and they simply do not execute? You cannot teach them discipline or self-control. You cannot teach somebody to control their fear and their greed. It's hopeless. The overweight person does not need your rules of success to lose weight or keep fit...(s)he knows them already. What they need you cannot give them. Maybe the best we can say is: very few people beat the index over time and with consistency...and almost no beginners can pull that off. Buy the S&P 500 and just go focus on improving yourself in other areas.
    My advice to the serious, obsessed DO IT YOURSELF investors: find the masters of allocating capital and find them while they still have a huge runway to grow their company further. For example, I know Warren Buffett is a master of allocating capital...but it's kind of hard to multiply 4 or 500 BILLION dollars. On the other hand, Todd Cleveland at Patrick Industries is already up 300-fold with the stock price of PATK since he took over in 2009 and he is still young and his company still has a tiny market cap of $1.5 Billion.

    1. Yes, buying only stocks over 1000$ may be a good advice.

  2. Beginner's also read too much financial porn. Become a student of the market. ROE + EPS + revenue growth all improving year over year. NOT quarter over quarter. Who gives a fuck! I then look at the chart for a good entry point.
    Never listen to TV gurus, newsletters and wannabees. Become a student of the market and get to know your companies. I bought CSU @ $926 smart? Not f'n likely. I just bought the dips this great company gave me at the time.
    After the fundamentals you listed I never buy until i look at the charts. Just me. Bonne chance!

  3. Beginner's have zero chance of beating the indices long term. My advice to them you can guess, and then go choose a less stressful hobby.

    1. It gets even funnier when some kid who is probably losing money "investing" in stocks announces that he will go try his luck trading commodities or trying his hand at currency speculation.
      As if penny stocks were not bad enough, let's go into something where failure is 99.9% guaranteed.
      One time I told this guy who wanted to "invest" in forex that it would be less painful to just slam his fingers in a car door over and over. I tried to explain with a simple poker concept. You are sitting down at a poker table. You look around that table. You spot the six best poker players in the world...and you take a seat. Can you spot the sucker? Who is the fish at that table? It gets worse in foreign exchange speculation when you are up against big banks, investment bankers, government insiders, and phd's in economics with every type of advantage over you. These beginner retail investors honestly believe if they just "learn" they will win in the end.

  4. Low beta (volatility) under 1 outperforms generally. Great underrated metric which I have been using since I started investing in individual stocks.


  5. I have not given much attention to Beta and been dismissing as I have always been thinking that during stocks with high beta tend to perform better than stocks with low beta when looking at a long period of time (say more than 2-3 years). I will need to revisit as you believe in it. An interesting find.

  6. “Search stocks with a beta lower than 1” why?