What's right for you?
What you'll learn:
- What approach the world's top investors use
- Will it work for you?
So which approach is right for you? Well, the fact is that few of us have the means to make billion dollar bets speculating on currencies, for example. Few of us, probably, have the intestinal fortitude, either.
But there is one method that all of us can follow, although it does require a certain mental fortitude. And the best thing about this approach is that it works. It identifies shares that, in the long term, are almost certain to do well. It’s called value investing and it has been practiced successfully by numerous investors the world over, for many decades. Warren Buffett, and his $43 billion fortune, is perhaps the best example.
But we won’t pretend value investing is dead easy, which is why other approaches sometimes gather more followers. But no investment approach that works well is easy, otherwise we’d all be doing it wouldn’t we? You need to develop the right habits and understand that any type of investing isn’t about ‘getting rich quick’. Those approaches that do work with minimal risk, are more about ‘getting rich slow’—it takes time to cultivate the right skills. Those investors who do persevere eventually find, more often than not, that their bank balance is the healthier for it.
Given that many of the world’s best-known investors have adopted value investing as their approach, we’re going to concentrate on that and examine what habits these individuals have adopted in order to be successful.
First and foremost, it appears that you need to have independence of mind. Value investors often find value in shares where others are not looking. Popular companies, paradoxically, rarely make the most profitable investments. You need to resist the temptation to follow the crowd to be a truly successful value investor.
The second habit, and almost as important, is patience. Shares can remain undervalued for some time before other investors realise they have made a mistake, and push the price up. You should be willing to hold the shares for at least three to five years, and you must be able to tolerate some large swings in the share price over that time.
And finally, you should be willing to undertake a little research. Without it, how else can you find the right shares to buy? But don’t worry, it is not a huge time commitment. With the right research tools and some application, you should be able to identify some good candidates for investment.
These habits are more difficult to develop than you might imagine, which is why value investing is not suitable for everyone. If your time frame is shorter, or you prefer the peace of mind that sometimes goes with following the majority of investors, then you may choose a different approach. We outlined some of these in the 'Investment approaches' section.
For example, if you think buying young, dynamic companies will produce results equally as good, then growth investing may be the way to go. Others may choose to try and time their entry and exit points with technical analysis. Some people simply like the fast moving nature of trading rather than longer term-focused investing.
Be aware, though, that none of these trading approaches is necessarily any easier. In fact, the shorter-term nature of these methods can produce more stress and require a much greater time commitment. After all, if you are buying and selling shares regularly you will need to watch the market much more closely than if you buy good companies and hold on to them for years.
All in all, though, for conservative investors at least, and that probably should be most of us, value investing makes sense. And it’s not hard to understand or apply, nor does it involve a massive investment in time. You just need to work on the habits we’ve mentioned, and be willing to keep on learning. That’s all.
