Less can be more. And, to me, simple investing can be better than complicated investment strategies.
In my time, I’ve witnessed some impressive write-ups about businesses and stocks posted in various places.
Those things were outstanding. Detailed in every way, and testament to many hours of focused research and analysis.
Where was the gain?
But all that work didn’t seem to benefit the authors with much of an advantage. In fact, many of those highly researched stocks went on to dive-bomb and lose money for shareholders.
That kind of outcome seemed so common that I almost started to believe there was an inverse relationship between over-research and results. You know, the greater the amount of time spent researching, the worse the investment outcome. That kind of thing.
Nevertheless, I believe in doing my own research. It’s essential. But the issue is all about how much. And spending too long with a business risks brainwashing myself into believing it can’t fail!
However, even though as shareholders we like to think of ourselves as part-owners of a business, we are not privy to inside information. We may not know everything going on in an enterprise. We only know information that companies choose to release.
So, we can only work with publicly available information and a company’s record of trading and financial results. And that means the process of investing in stocks and shares is all about anticipating probabilities.
Six simple steps
Therefore, I’ve settled on a simpler approach to research. And the first priority is to check the basics. So, I look for a business with a strong balance sheet. After all, poor financing can lead to negative investment outcomes. And it can sink companies even if they are trading well.
Secondly, I look for an enterprise with good quality indicators because they suggest a well-defended and profitable trading niche. And thirdly, I’m after a long runway of potential growth ahead. The businesses in my stock portfolio need to earn their keep by compounding a growing earning stream over time.
My fourth consideration hinges on the realisation that a business is not the same thing as a company’s shares. I can find the most wonderful, growing business and still end up with a poor long-term investment. And that’s because speculation, sentiment and other factors can cause stocks to swing wildly above or below what a business is actually worth.
And the way we can tie a business to its shares is by looking at valuation. So, my fifth consideration is to find a business with a valuation that makes sense of a long-term investment.
Management integrity
For me, then, over-analysing is out the window. My choice is to outsource the business analysis and strategic planning to the directors of a company. But it is important to require integrity from management teams. Therefore, as requirement number six, that’s something I look into up-front and monitor while I’m holding stocks.
Even with this approach in mind, it’s still possible to lose money. And that’s because all businesses and shares come with risks as well as positive potential. Nevertheless, I do believe effective investing in stocks and shares really can be this simple.
