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Investing in shares-6 tried and tested principles

Have you ever considered investing in shares in the stock market? 

If you are thinking about investing some hard earned cash, and you have concerns and fears about how to do it successfully, there are two investors in the United States who have shown us the way: Peter Lynch and Warren Buffett.

If you look at the approach of both men you will see a great deal of similarity in the philosophy of each guru.

Let’s take a look and see what we can learn. Before we do so, however, I can assure you from personal experience with my own money that the principles practiced and taught by both of these towering figures in the investment industry work.

Firstly, do not try to predict the stock market or interest rates or other macroeconomic factors over which you have no control. It is a fool’s errand to try to do so and anyone who tells you what the market is going to do is misleading you and/or deluding themselves.

Secondly, buying a share in a company is not like buying a lottery ticket or getting a betting slip at the races. You are investing in a company and that share represents your part of the company. You need to focus on what the company is doing, not what the stock market is doing.

Thirdly, small investors have a huge advantage over institutional investors because they can bide their time and invest their money only when they feel the time is right and they have carried out their essential research.

As to time, did you know that if you bought WalMart when it floated on the stock exchange you would have made 500 times return on your money. But if you bought the shares 10 years later you would still have made a 35 times return on your investment. 

If you missed out on Microsoft when it floated and only bought the shares 3 years later you would have received a 10 fold return on your investment.

It is a mistake to believe that your timing must be perfect and you must invest when a company floats or you have missed the boat. 

Fourthly, invest in companies who sell products or services that you understand. Know what they are doing. For example, Lynch made a lot of money in Dunkin Donuts and Warren Buffett has made a fortune in Coca Cola.

It is no coincidence that the activities of both of these companies are known and understandable to any savvy investor. Invest and operate within your circle of competence, is how Buffett puts it.

And Lynch makes the point that he can walk into a Dunkin Donuts any time and, regardless of the economy generally, get a feel for how they are doing with no worries about cheap imports from China or Korea to worry about.

It is reasonable to predict with some degree of confidence what these companies will be doing in 10 or 20 years time. That is not the case with a company involved in high tech products on the cutting edge of science or computing or artificial intelligence.

Fifthly, there have been 50 declines in the US stock market in approximately 100 years. This means that the market has experienced a fall of, on average, 10% every two years. There have been 15 declines of 25% or more over the same period of time-that is, an average of 6 years. But each of these falls present great opportunities to buy at a low price and secure shares of tremendous value for your portfolio.

Sixthly, invest in good companies and do not be seduced by what appears to be cheap shares in a company that may be on its last legs. Buy quality for the medium to long term.

Finally, buy shares at a price below intrinsic value. Buffet looks at the net present value of future cash flows from the company and discounts back those cash flows to the present day.

At its essence he is looking at how much money will he get back on his investment over the next 50 years and when will he get that cash. He then puts a value on the share based on this calculation and decides whether it is good value or not.

If you follow these 6 straightforward principles you will make an excellent return on your investment provided you buy and hold your shares for the medium to long term.

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