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Wow. It’s amazing how the summer heat really gets to everyone. Brokers, analysts, and fund managers all seem to be taking a break. I don’t blame them. After the turbulent ride we’ve experienced, we all deserve a great summer.
Last week (see The Catch 22), we talked about unemployment numbers and how corporations are still extremely cautious on hiring and spending. The amount of cash each company holds is now far greater than they were before.
Recent analyses suggest that S&P 500 companies are sitting on US$1.8-trillion of excess cash – that’s not including any banks! This clearly shows that corporations are still worried about the economic recovery and feel that there is a chance of a double-dip recession.
According to Pierre Lapointe, global macro strategist at Brockhouse Cooper, both the S&P 500 and S&P/TSX Composite in Canada have several companies with cash-to-total-asset ratios well above 40%, and in some cases above 60%. From a short-term investment point of view, these numbers do not bode well for investors in these companies.
When companies aren’t spending, chances are they aren’t growing either. So in the short term, the upside is minimal, while the downside still weighs at chances of a double dip.
But that doesn’t mean the markets will come to a complete standstill. Over 100 companies have already announced share buyback programs which can spell small returns for investors if played correctly.
However, small returns are not very encouraging when you weight the short-term risks. The reality is that investors are just going to have to be patient. Until corporations start spending and until the summer is over, there really isn’t a whole lot to get excited about. So while the market takes its summer vacation, we’re going to use this time to share some advice from the top investment minds in the world.
Imagine investing $10,000 in a fund, that would be worth $280,000 13 years later. Well, if you did just that with Peter Lynch’s Fidelity’s Magellan Fund during the time he was the ring leader, you would have been able to just that.
Peter Lynch is arguably the world’s greatest mutual fund manager averaging over 29% annual returns during his short tenure as head of Fidelity’s Magellan Fund. A $10,000 investment into Magellan in 1978, adding $100 per month, would add up to over $1 million, in 20 years.
So how did he do it?
Peter Lynch kept it simple. He didn’t use any fancy computer trading platforms or crazy gimmicks. As a matter of fact, everything he did was so simple that anyone could do it. Really.
In one of his books, he gave us 25 rules that anyone can follow to achieve the kind of success he had. When we compared his rules to our own investment criteria, we weren’t surprised to see that they are very similar to ours. As a matter of fact, they are very similar to some of the best investors in the world, including Warren Buffett.
The 25 Rules to Successful Investing
Rule 1: Investing is fun and exciting, but dangerous if you don’t do any work.
Rule 2: Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
Rule 3: Over the past 3 decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
Rule 4: Behind every stock is a company. Find out what it’s doing.
Rule 5: Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.
Rule 6: You have to know what you own, and why you own it. “This baby is a cinch to go up” doesn’t count.
Rule 7: Long shots almost always miss the mark.
Rule 8: Owning stocks is like having children – don’t get involved with more than you can handle. The part-time stock-picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time.
Rule 9: If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
Rule 10: Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.
Rule 11: Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners.
Rule 12: With small companies, you are better off to wait until they turn a profit before you invest.
Rule 13: If you are thinking of investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.
Rule 14: If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10,000 or even $50,000 over time if you are patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.
Rule 15: In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.
Rule 16: A stock market decline is as routine as a January blizzard in Colorado. If you are prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
Rule 17: Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
Rule 18: There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
Rule 19: Nobody can predict interest rates, the future direction of the economy, or the stock market, Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you have invested.
Rule 20: If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall Street.
Rule 21: If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Rule 22: Time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
Rule 23: If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. H
ere, it’s a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value small companies, large companies etc. Investing the six of the same kind of fund is not diversification.
Rule 24: Among the major stock markets of the world, the U.S. market ranks 8th in total return over the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.
Rule 25: In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.
These rules are simple. But they are extremely effective when you break it down.
There are so many great companies out there in both the junior and large cap spaces. So many, in fact, that two to five years from now, many of them could easily be trading 10 times the value of where they are today. Remember, the Dow was less than a measly 3000 points in 1990, 6000 in 1996, and a strong 12,000 in 2006. This shows that if you have patience, investing doesn’t have to be that difficult.
Of course, our goal is not to make 10% a year (even though that is a great ROI by any standard.) Our goal is to invest, with minimal risk, to make returns that can change our lives. Too often we have been spoiled by drill results and promising technology, that we forget to remember that both mining and technological advancements are time-intensive processes. But that one company, out of the many you may invest in over time, can spell incredible rewards…if you have patience.
The list of these companies go on for miles. Large caps like Microsoft and Silver Standard, both gave early investors a reason to retire. Even junior companies, such as Evolving Gold, turned small investments into big time portfolios.
In the end, invest what you know and don’t invest without doing any work. Don’t be down on yourself if a few of your investments lose 10, 20, even 30%. It doesn’t matter if you invest in five companies and four of them are failures. All it matters is that at least one of them is a winner.
Ask any successful venture capitalist and they will tell you that their failures far exceed their successes. I met with an extremely successful venture capitalist last year and he told me that as long as 1 out of the 5 companies he invests in makes it, he’ll continue to be rich. Often times, their successes generally take anywhere from 5 – 7 years before he sees a return.
So be patient, be diligent, and be proactive. Success will follow.
Until next time,
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