A little over 20 years ago, I bought my first stock. Since then, I’ve experienced (and learnt) a lot. Ultimately, this experience has made me a much better investor. Today, I have far more success investing than I used to.
I’m not perfect and success isn’t guaranteed. But in this article, I’m going to share some of my top stock market investing tips. Hopefully, these tips can help investors avoid some of the mistakes I’ve made over the last two decades and get on the path to greater investment success.
Owning 20+ stocks
One of the most important things I’ve learnt over the years is that risk management is vital. It’s crucial to limit big losses because they can really set me back.
One of the easiest ways to reduce risk is to build a diversified portfolio containing many (20+) stocks. If one or two stocks in the portfolio underperform, I can still have success overall.
Thinking about portfolio construction
Portfolio construction is also very important. Here, it’s a good idea to think about both risk and return and allocate capital to stocks accordingly.
It’s generally not a good idea to take large bets on higher-risk, speculative stocks. These kinds of stocks can play a valuable role in a portfolio. However, they should be smaller holdings so that risk is minimised.
The UK has some great companies. However, many of the world’s most dominant companies (Apple, Amazon, etc) are listed overseas. Building a global portfolio is a good idea, in my view. Not only can this approach potentially enhance my returns, but it can also reduce risk.
Investing in high-quality companies
One thing I’m increasingly realising is that investing doesn’t need to be complicated. Invest in great companies at a reasonable price and hold for the long term and I hope to do pretty well.
Great companies come in different shapes and sizes but, in general, they have a few things in common:
A fantastic product or service
A competitive advantage
Strong long-term growth potential
A strong balance sheet
A high level of profitability
Looking at ROCE
If I had to pick one metric to focus on however, it would be return on capital employed (ROCE). This is a measure of how profitable a company is. It tells us the amount of profit a company is generating per £1 of capital employed. It’s calculated by dividing operating earnings by capital employed.
The reason this metric is important is that companies with a high ROCE tend to get much bigger over time because they’re earning large profits. And companies that get much bigger over time tend to be good long-term investments.
Don’t stress about valuation
Valuations are important in investing. However, they’re not the be-all and end-all. One thing I’ve learnt over the years is that it’s not a good idea to buy a stock just because it’s cheap. Often, cheap stocks are cheap for a reason (and end up get cheaper).
Similarly, it’s not a good idea to ignore a stock just because it’s a little bit expensive. Many of my best investments have been stocks that were a little bit expensive when I bought them.
The bottom line is that often the best companies have higher valuations, simply because everyone knows they’re great companies worth investing in.
The post After 20 years of buying stocks, here are my top stock market investing tips appeared first on The Motley Fool UK.
Edward Sheldon owns shares in Apple and Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple and recommends the following options: long January 2022 $1920 calls on Amazon, short March 2023 $130 calls on Apple, short January 2022 $1940 calls on Amazon, and long March 2023 $120 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021