Some strategies that have proven their worth
The value investing strategy, made famous by financial analyst Benjamin Graham and championed by the likes of American investor Warren Buffett, is summarized by with the motto: “This too will pass.”
Basically, pick a good company, in a moment when it’s undervalued for some reason: bad news, lost contract, temporary mismanagement etc. Buffett has likened good companies to castles with a deep moat around them – that is they have a competitive edge durable in time, an unique product, customer loyalty or pricing power. Think Apple, American Express or Coca Cola.
The growth investing strategy, championed by fund manager Cathie Wood, tries to identify companies whose earnings will grow very fast (but could crash equally fast). Companies like Tesla, Coinbase, UiPath, Roku etc. AI has given a huge boost to this strategy recently, but in long term, it’s hard to tell if it’s better than the value strategy.
A different approach, favoured by investors that prefer a more stable stream of income, is the dividend strategy. Dividends are the money distributed to shareholders from company’s profits. Historically, dividend stocks have outperformed the S&P 500, and with less volatility. Think about it: you get a return on investment from stock price growth as well as dividends that you can reinvest.
In sum, pick a strategy that fits you and get to work. You can pick stocks, or you can pick diversified funds. As investor Peter Lynch insisted, “know what you own, and know why you own it.” Invest in stocks or funds whose business model you understand. Love cars? Study different manufacturers, see what different companies are working on, what customers like this year, and figure out who’s making money before quarterly statements are pointing out the winners and losers.
What should I be careful about?
Many new investors buy on the hype. Imagine there’s some good news coming up about Tesla. You wake up, and while having your coffee, you see the news and buy the stock.
But think. Investors following TSLA already know what the article is about. By the time you’ve read the news, people with deep pockets on Wall Street are already placing their bets. By the time you buy the stock, the market will have already integrated that news and now the price will probably go down.
Same with the long-term hype: when your cab driver is giving stock or crypto advice it’s time to get out of the market.
Another pitfall is the quick money, speculation, dopamine addiction. Subreddits like r/wallstreetbets provide many great examples of this. If you turn your life into a casino, you will win some times, but in the end the house always wins. A bet here and there can be fun though.
As a young person, you have an advantage: time. As you get older you will understand the long-term trends and market drivers — economy, geo-politics, innovation and so forth. As you progress in your career, you will understand more about your industry and this too may turn into profits. Over the years, eight per cent per year, with compounding, goes very far.
Finally, as ethical people, we need to walk the talk. We can’t pretend to want to save the Earth if our money is going to heavy polluters. Beware of pretenders — many are just deceptively mimicking behaviours to get high environmental, social and governance scores.
Research well your investment and its entire supply chain. Think about what goes into making the product, the people behind it and what impact it has on our world. Are you morally comfortable giving your money to certain companies?
Put in the time and don’t rush in, some investments are for life.
