Modern day stock picking is akin to gambling money in a casino, you place money on a particular ticker symbol and hope that it goes up. How many times have you read an article on that ‘one magic stock’ or seen people speculate on a single stock based on an online forum. The majority of people think that the stock market is a route to overnight millionaire status. The mass media has led people to believe this as they selectively run stories on people who have become millionaires overnight based on a single stock pick whilst sunning the countless others who have lost it all by placing everything, including their house on that one single magical trade.
Frankly, I detest this kind of stock picking culture that has crept into our society. More and more, people are concentrating on the short term, dissecting why shares of some firm have gyrated a percentage or two in any given trading day. there is this element of inherent speculation and unrestrained emotion that makes me uncomfortable. And I don’t like that.
It still astonishes me that people treat their portfolio as a source of excitement rather than a way to make money.
For me, what I love is to be a part owner of a business. And this is what the stock market is good for. It allows me to get my hands on the ownership stakes of some of the best businesses in the world. When I press the buy button on my brokerage account, I do not have the intention of selling my stake for a quick gain. Rather, I aim to sit on my position for years, if not decades to come. I don’t care for volatility as it is the price you pay to get an ownership stake in a wonderful business. I don’t care for price declines as I believe for paying for stocks in full without borrowed money – I sure as heck don’t want to be selling low when the margin lender comes calling! I don’t care about quarterly earnings guidance. rather, I care what I pay relative to the core, long-term economic engine of the business.
To make profits in the stock markets, you need to think rationally. For this, you need to be patient, emotionally stable and wait on the sidelines for long periods of time till you get a valuation that attracts you. This is why I love my strategy of investing in dividend paying stocks. It requires me to become proficient at identifying what to buy and under what conditions to buy it, the letting time do the rest.
This is why I hate the term ‘stock picking’. I consider myself a particle owner rather than an owner of a piece of paper, a piece of stock. I don’t few my ownership of BP or Tritax Big Box any different than were I to have my own private company and put a management team in place to run it. The proof of this is in my stock market transactions. Go ahead and have a look to see how little selling activity I do. Even in the face of wild market swings, like e have seen in the first half of 2016, I have kept hold of my ownership stakes in BP and RDSB despite them being in loss positions at one stage. My patience has been rewarded and these two stocks have soared back to fair value and beyond. In activity is truly the friend of a patient investor.
What is of interest to me is the underlying business performance of a business. I want to know the intrinsic value of a business. I want to know the Return on Equity and what is driving it. I want to see sales trends and understand what is driving it and what risks it faces moving ahead. I want to see a business that is in a better place now than it was 5 or 10 years ago. And importantly, I want to see a business that throws of gushers of cash to its investors in the form of dividends.
Once you find a great business, the key is to not overpay. You need to have that in-built margin of safety to protect yourself. You can still find pockets of value in this overheated market. Just have a look at my recent ISA 15/16 portfolio which shows all holdings to be in surplus. This shows the importance of having a margin of safety by not overpaying for stocks. As Warren Buffet says, ‘ rule number 1 is never lose money. Rule number 2 is to never forget rule 1.’
This is why I stated that I don’t like modern stock picking culture. Stop focussing on what will be up or own over the coming year. Stop buying into trends or fads or the current ‘cool’ company. Instead, thing long-term and aim to build a portfolio of assets that will give you an above average performance over the next 5-10 years.
On that note, I will leave you with the following excerpt from Norwegian Billionaire, Kristian Siem:
Industry, by nature, is long term, and the fund management business, by nature, is short term. Financial investors come in and out: They can push a button any day and get out. The principal industrial investors don’t have that luxury. They have to think for the long term. I believe indeed the success of industry is that you always think long term, so even if incidents like mergers or takeovers cause you to be out in the shorter term, you take the long-term decision as if you were to be the owner forever. That is healthy for the industry, and therefore also for its shareholders. I think that has been the success of our operation.