Not everyone has the luxury of time to read 500 pages of annual reports, industry publications, and newspapers daily to find new ideas. We have family and career obligations yet aspire to manage our own investments over passive investing or managed funds. Some would opt for paid services that filter or recommend stocks that shorten the time to find new ideas. Another alternative approach is to own great stocks.
Great stocks are ones that have the ability to generate a high return on invested capital over 10-20 years. You can read more about return and cost on A short guide to investing. The reason they are ideal for the time poor is that this approach increases holding period, thus reducing the chances of selling and the time spent looking for new ideas to reallocate your capital.
Think of investing as a leverage. The meaning of leverage is context dependent but in general, it means to use something to maximum advantage. A mortgage is a form of leverage, so does using borrowed money to invest. For great stocks, you leverage on the competitive advantages (moats) of the business as well as management quality to do the heavy lifting for you to achieve your financial goals with minimal effort (time). Another subtle advantage is given the prevalent short-termism in the market where holding period is less than a year, it gives you a huge edge by thinking long term. This buy and hold approach is not buy and forget. You still need to keep yourself up to date about the business at least half yearly but it does free up your time to focus on other important things in life.
Contrast this with poor economics stocks. Deep value investors leverage on the fear of others in the form of dirt cheap price to make a profit. Both approaches can be profitable when done right. The margin of safety for deep value stocks come from the price you pay, whereas for great stocks, it comes from their business model. The difference between both comes down to execution. And when to sell matters a lot for deep value stocks. Time is the enemy of a poor business so you cannot afford to hold it for the long-term. And you’ve to commit more time to search for new ideas once you sell them. This also underlines the importance of aligning investment strategy with your lifestyle.
The risk of owning great stock comes from overpaying (pricing risk) because they are rarely available at a discount. Although in general if you overpay, you should still turn out okay in the long run if the value of the business increases every year. But to be safe (more things can happen than you ever imagined), you can use dollar averaging or buy during the crisis to mitigate this. For dollar averaging, you set a fixed amount of capital to invest in a set of timeframe, maybe quarterly, half yearly or yearly, and you’ll buy less amount of shares when the price goes up and more when it’s lower. When there is crisis, in particular, macro factors panic not related to the stock, that’s the perfect time to load up.
One of the main obstacles that prevents investors from owning great stock is ourselves. This approach demands a temperament that values inaction over action and long-term business focus over the quarterly result, hence it is so hard when the market is telling us what to do everyday, and that’s what kills most investors. It is far from impossible but requires a change in mindset to overcome it.
Christopher Mayer’s 100 baggers and Thomas Phelps’ 100 to 1 in the Stock Market will give you an idea on how to find the next stock that will return 10,000%. I would recommend keeping a list of great stocks that have a delivered consistent track record over the years with high insider ownership ( >10% ), understand the business, wait for it, and pounce.
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