This week at a Nedgroup Investments roadshow, Dave Foord of Foord Asset Management and Piet Viljoen of RE:CM gave their views on the key to successful investing. Both of them strongly believe in long-term investing and that short-term speculation is a mug’s game which just generates costs for investors.
- Investing is what makes you rich, not speculating.
- Investment is the long-term ownership of a business that is gradually increasing its intrinsic value through providing goods and services that customers actually want.
- Speculation is buying and selling pieces of paper based on forecasts of the price movement on those pieces of paper, based on sentiment.
- Risk is not volatility; it’s the permanent loss of capital. Bernard Madoff’s fund had no volatility until it became worthless.
- The market is not an accurate reflection of value. For example, a company may have 300-million shares in issue and 200Â 000 trade each day. The price may trade all day between R11,10 and R11,65, but at the close, a trade of 100 shares at R12 determines the price for 300-million shares. You don’t know why people are buying or selling or what’s driving their decisions. It could be to pay off debt or to rebalance a fund. Maybe only two investors traded — based on value — the whole day. You need to work out the value yourself.
- The most important decision is to buy at the right price; then you can ignore the market noise. Spend your time working out the right buying price
- Hold on to quality shares and never sell unless you have made a mistake.
- Quality of earnings are critical. Look for companies that will deliver robust earnings into the future. These companies have pricing power in their industry. Robust companies make money from the volumes of trade in their business, not cost cutting.
- Quality of management is also critical, they must be trustworthy and able to manage risk while taking advantage of opportunities.
- Watch interest rates vs dividends. Asset classes compete for capital so when interest rates are low money will go to other investments offering better returns and vice-versa.
- Compounding is the key to financial success. You need time in the market and patience.
- Returns over the last ten years have been above trend, adjust your expectations for future returns.
- Watch costs, these erode your returns. Trading increases the costs of investing.
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