Today, I am going to share with you my learnings for creating an investing strategy that will never let you down.
If you’re like me, you would have dabbled with many investing strategies when starting out. Growth stocks, dividend stocks, large caps, small caps, micro caps, etc. – the choices can become overwhelming.
Below, are 5 actionable steps to create an investment strategy that can give you peace of mind and great returns.
Now, let’s dive in.
1: Invest In Your Interests
Invest in the companies that are personally interesting to you.
If you love technology, you will find it interesting to read the annual reports of tech companies or listen to their earnings calls. But if you had to read the annual report of a pharma or heavy metals company, it may become a snooze fest.
As an investor, you spend the majority of your time reading annual reports, so make sure it’s interesting to you.
2: Focus On Avoiding Losers, Instead of Chasing Winning Stocks
If you avoid risky companies and reduce the downside, your portfolio will look healthy when you’re in a bear market.
In a bear market, the supposedly “high-risk-high-return” bets get hammered and they take ages to recover. A stock that is down 50% will now need to double to reach the previous level – which may take a long long time or not at all.
3: Circle Of Competence
If you’re clueless about the companies you invest in, you’re bound to lose money. If not now, then later.
This was evident in the recent crypto bull market where everyone jumped into investing in coins with fancy names. Except for a handful of people, nobody else knew how crypto even worked.
Result?
Bankruptcy and massive loss of wealth, as even “stablecoins” like bitcoin tanked by 75% in a year.
So make sure you know how the company/industry works, and that you can read its annual reports without getting confused.
4: Long-Term Thinking
Investing is all about compounding, and when you stay invested for the long term, you’re allowing the market to compound your wealth.
In the below example, you can see what happens when you let an initial sum of $100,000 compound at 10% for a different number of years. Just by investing for 5 more years after the 25th year, you get a 17-bagger instead of a 10-bagger.
5: Margin Of Safety
Having a margin of safety when you buy stocks gives you sufficient cushion if your thesis goes wrong.
Seth Klarman explains it beautifully in the quote below:
The best investments have a considerable margin of safety. This is Benjamin Graham’s concept of buying at a sufficient discount that even bad luck or the vicissitudes of the business cycle won’t derail an investment. As when you build a bridge that can hold 30-ton trucks but only drive ten-ton trucks across it, you would never want your investment fortunes to be dependent on everything going perfectly, every assumption proving accurate, every break going your way.
All you have to do now is to go out there and evaluate your investing decisions against the 5 pillars described above. If any of your investment decision go against them, then you are possibly dabbling with risky bets.
If you want to know I minimize risk in my stock portfolio, here are the 6 different ways