As I look back on my 30-year career in the investment business I think back to the many things that I have learned along the way and considered what advice I would like to give myself 30 years ago. Avoiding the fantastical suggestions like put every penny I had in Apple stock in 1997 when it was $0.16 a share or betting on the New York Giants beating the undefeated New England Patriots in Super Bowl 42, I decided to offer some simple lessons that have served me well and I believe will continue to serve investors well into the future.
So here is my version of the Magnificent Seven:
- A slow dollar is better than a quick nickel or put another way getting rich slowly is infinitely better than going broke quickly.
For whatever reason we treat investing like it is a sprint when in reality it is a long marathon. Maybe as a result of the 24-hour financial news available to us or quite possibly some of the so called “advances” that we have made to investing over the last 30 years it appears that we have become rather short sighted in our investment approach. I would recommend the opposite, as investors we should be less concerned about next earnings and more concerned about the longer-term prospects of the investments we allocate capital towards. According to Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it …he who doesn’t…pays it.”
2. Good corporate management should be treasured, and bad corporate management should be avoided.
The road to perdition is paved with bad corporate managers who have taken otherwise viable (and sometimes pristine) corporate institutions and destroyed untold amounts of shareholder wealth. Many times, they have enriched themselves at the expense of their shareholders but when you happen upon truly good corporate management you should invest accordingly. The challenging part is discerning the difference between good and bad managers since often times today’s media darlings are tomorrow’s villains and scoundrels. A reasonable dose of cynicism might serve you well.
3. Cash is always better than a check.
There have been many pages written about the “next great thing” or how a company’s earnings will grow dramatically at some future date. Remember that cash today is infinitely better than a check tomorrow. As such earnings (or more specifically real cash flow) are of paramount importance when looking for potential investments. Keep in mind that for every “next great thing” that does come to pass there are probably at least 10 times that amount that have been confined to the dustbin of history.
4. Avoid the big loss.
This is easier said than done. You never want to hold or sell a position based purely on what you paid for it versus what the current value is. In this way you will need to be able to discern when you should exit a position rather than increasing your position when the price action has gone against you. Sound analysis will help you in these situations, but the best advice is probably from Mark Twain who said “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so”. So be skeptical of even your own analysis and assumptions.
5. It is better to build a portfolio than trade a portfolio.
Although this might seem like a very antiquated notion especially with the virtual elimination of trading costs compared to what they used to be, when I look at the Hall of Fame of Great Investors there are almost exclusively comprised of individuals who built portfolios over time as opposed to people who constantly traded positions without holding on for the long term. Keep in mind that wealth is built over time not overnight.
6. Valuations are a terrible timing device but are critically important in determining future returns.
Unless you can make the same trade with the guy who sold Jack the magic beans that grew the into the beanstalk you would be well advised to evaluate the relative valuation of your potential investment. This doesn’t mean that overvalued investments can’t become more overvalued but the probability of them returning to a more normal valuation is generally equal to that of undervalued investments returning to normal valuation. As Benjamin Graham stated long ago “In the short run, the market is a voting machine but in the long run, it is a weighing machine”. The forces of economic gravity are long and variable, but they are also immutable.
7. Patience will be your greatest asset and the hardest one to acquire.
Even if you master the first six steps that I have outlined patience is the most challenging aspect of investing. Many times you will feel the need to act even though often times inaction will be the correct path. You will need to allow time to pass so that the investment field that you have planted has a chance to grow. To that end I would suggest the following advice from the wise philosopher Winnie the Pooh who said, “Sometimes I sits and thinks and sometimes I just sits”.
Happy investing.
Sascha Rizzo, CFA, CFP
Senior Portfolio Manager/Market Executive and Senior Vice President
*Trust and Portfolio Management services offered by Cypress Bank & Trust are not insured by the FDIC; are not deposits, are not guaranteed, and are subject to investment risks, including possible loss of the principal invested.
*This article was prepared by Sascha Rizzo. Opinions expressed in this article are the author’s own and do not reflect the view of Cypress Bank and Trust.
