• Think of stocks as businesses.
• Invest only in a very few select companies which offer a large margin of safety.
• Buy a meaningful amount on each stock selected.
• Keep a very low portfolio turnover (avoid transaction costs).
• Invest for the long term. You should be prepared for the inevitable market ups and downs which often represent opportunities.
• Ignore market forecasts.
• Never leverage.
Learning to Achieve Long Term Investment Returns while Taking Care of the Risk, First.
Thursday, August 16, 2012
Lessons to be Learn: Focus investing
First and foremost, when scanning the market for investment opportunities, there are only a very few securities offering a substantial margin of safety (where the valuation of the company is well over the market price). It is only in these securities that you should deploy capital.
* Equities portfolio should be concentrated around a few select companies where you have a very high level of confidence.
* A large part of capital should be deployed for each security chosen.
Over a 30 years period, you may only find a handful of companies where your level of confidence is very high. So it is necessary to be patient. Another advantage of portfolio concentration is that you will pay less in brokerage and commissions. You will also be able to delay taxable income.
* Equities portfolio should be concentrated around a few select companies where you have a very high level of confidence.
* A large part of capital should be deployed for each security chosen.
Over a 30 years period, you may only find a handful of companies where your level of confidence is very high. So it is necessary to be patient. Another advantage of portfolio concentration is that you will pay less in brokerage and commissions. You will also be able to delay taxable income.
How to calculate your compound annualized investment return
It can be difficult but to keep it easy, you can apply the following formula:
10^(LOG(PV/C)/(D/360))-1
where
PV: Value of your investment at the end
C: Capital invested
D: Period of investment (in days)
It can be a lot more complicated if you have added or withdrawn capital from your account. In this case, to have a back of the envelop idea of the figure; you can modify the capital invested to take into account the transactions which did occur during the period.
It is worth to do the calculation for different periods (last year, last 3 years, last 5 years …) using the financial statements sent by financial institutions and you will probably be surprised to find out that your figures differ from the returns advertised. This is because financial institutions don’t advertise the compound annualized investment return … Yet, it is really what counts!
10^(LOG(PV/C)/(D/360))-1
where
PV: Value of your investment at the end
C: Capital invested
D: Period of investment (in days)
It can be a lot more complicated if you have added or withdrawn capital from your account. In this case, to have a back of the envelop idea of the figure; you can modify the capital invested to take into account the transactions which did occur during the period.
It is worth to do the calculation for different periods (last year, last 3 years, last 5 years …) using the financial statements sent by financial institutions and you will probably be surprised to find out that your figures differ from the returns advertised. This is because financial institutions don’t advertise the compound annualized investment return … Yet, it is really what counts!
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