Things that I gain as I get older are not only grey hair but I feel I am getting wiser through experience (as opposed to what my wife says). I have been investing on my own for last 3 years in the stock markets and the journeys have been interesting.
My investing styles have changed significantly last 3 years and had about 4-5 major transformations to get to my current investing style. I figured I would write it out for you.
Pre DIY investing- Mutual funds investing
It is quite embarrassing but I am quite guilty here. Yes. I invested in mutual funds without knowing what investing really was. I had an idea that I had to put the money to work but knew nothing about investing. I remember the first day I opened the mutual funds. I went to a TD bank and the teller and I went through about 30 questions or so to find out what my risk comfort level was. The style that the software picked based on my answers was TD balanced mutual funds which was like 60% equity and 40% bonds. It was quite embarrassing to pay 1.5-2% MER to the TD (without knowing I was paying that much… I thought the service was free and felt I was very smart) but on top of that the stupid questions and my brainless responses put this young and poor fella to invest in 40% in bonds… What’s even more embarrassing is that I was an accountant but had no clue what I was doing and neither was the teller. The software who decided 60% equity and 40% bonds was the only thing knew what it was doing among us.
Pros-easy and quick to set up
Cons-mostly below average performance after MERs
First style- Index funds investing
After realizing how much TD bank had been robbed me over time, I sold off the mutual funds and invested everything to Canadian and US index funds. I did pretty well with it. Although I felt that I could do better by picking stocks individually, investing in index funds was very easy to execute. I could really focus on my life as this got really easy and boring. Boring is good in investing. I automated this by saving and buying ETFs every month and repeated regardless of where markets were going. I really liked index investing for its simplicity, peace of mind, low cost etc… but I did not like the fact of owning many below average companies from the pool. I may go back to index funds investing when I feel like I have enough money and want to more focus on what’s more important in life rather than watching stock markets every day.
Pros-Very easy, simple, some constant cash flow(dividends), low cost, relatively stable, you can own basket of companies in other countries
Cons- Can’t weed out companies that you do not want to own, performance will always be average, some country index funds are not really diversified (E.g. Canada and Australia index funds are very Financial and commodity heavy)
Second style- Value investing (or I would call it classic dirty investing)
I started reading lots of DIY investing books and blogs and seemed that most of bloggers do well by using so-called value investing. I felt that I could do better than them and started selling off all index funds and started buying individual stocks. I did not have certain strategies and started buying what others were buying with minimal research or whatever looked cheaper based on P/E multiples thinking I was genius. Some picks worked, some did not work. The strategies made me obsessed with stock monitoring on every few hourly basis. I realized value investing was really hard to execute properly and I had to be very patient for a long time. It often hurt my feelings seeing some of my picks in red for days, months or even years. This could be an area that may give you a huge return but you gotta be exceptional at executing strategies from buying to selling. Timing is important. When things worked out it gave me more than 200% return in a relatively short time (e.g. I bought Home capital group at around $6 and sold at around $16-17 within 3 months. It even went up to $20ish then dropped to back to $13). Only few that I think do well with Value investing are Francis Chou and David Einhorn
but even they have been struggling lately… so if value investing is challenging for these two proven investors then you probably should be away from value investing as well.
Pros- If executed properly, you can have exceptional returns
Cons-Very challenging to properly value companies, emotionally tough, requires tons of patience
Third style- Dividend or dividend growth investing
This probably is the most popular strategy by DIY investing bloggers and their followers. There are literally more than 100,000 blogs out there copying each other without really measuring their yearly performance. I liked the idea of having constant flow of cash so I had been with the strategy for about a year or so. I did ok with it because it is supposed to give an ok result as majority of dividend payers or consistent growers are stable large caps with low growth perspective. They would be Canadian banks, Utilities, Telecommunications, Energy, REITs etc… It would give people a good feeling of getting cash flows and some people can set up DRIP to own more stocks each time dividend is declared. If executed properly people would be able to do slightly better than index funds as consistent dividend growers (which is very good signal) may indicate that companies are stably growing and you may be able to weed out bad industry (e.g. commodity or energy etc…) and companies. Some people may fall into dividend trap so watch out for extremely high dividend payers as they will likely cut their dividends if dividends are not sustainable and when that happens, the stock prices typically crash as many dividend investors leave the scene. I always thought that this strategy should be utilized by retirees or old people who do not have day jobs, no other incomes to put into markets.
Pros- constant cash flow, stability especially during downturns, solid returns (e.g. Royal bank, TD, Canadian National Railway etc…), dividends are tax preferred
Cons- low growth, time and effort consuming to do it properly
Fourth style- GARP Growth At Reasonable Price investing
Many books helped me shape my current investing strategies.
Phillip Fisher’s Common stocks and uncommon profits,
some books about Warran Buffett
Peter Lynch’s One Upon Walstreet,
Joel Greenblatt’s The little book that beats the markets,
Stephen Jarislowsky’s Investment Zoo,
Jim Slater’s The Zulu Principle etc…
Lots of readings and research made me realized and concluded that Warren Buffett, my favorite icon is actually a GARP investing guy. I know that he was influenced by his teacher, Ben Graham and used to be a value investor but he quickly changed his investing style after he met Charlie Munger and started adopting GARP investing style.
Probably the most important idea about GARP is ‘quality matters the most’. As long as the business is fundamentally strong, price you pay now may seem expensive but is actually reasonable.
Facebook, Google, Amazon, Constellation Software, Dollarama, etc… have almost always been traded at extremely high P/E and Cashflow multiples compared to other companies but if you held them let’s say last 10 years, your $10K of investment would have become 60K (5 years), 45K, 280K, 375K and 150K (8 years) respectively, whereas your $10K investment on RBC would have grown to $25K…
Pros- Impressive returns, higher chance to beat the markets
Cons- Fundamentals are difficult to analyze, time and effort consuming
I have been using GARP investing style for about a year now and I think I have been doing pretty well (well markets have been doing well as well).
I sleep pretty well every night. I am currently managing a very concentrated portfolio with top 10 holdings accounting for more than 75% of total value of the portfolio and I am quite confident that my picks will more than likely beat the markets (at least 70% of time…?)
I don’t think there is a best investing style among many others but as I went through various investing styles to find my fit and stick to my current investing style, you should find your own investing styles that fit your investing personality. It could be dividend growth investing style, value investing style etc… and if you really stick to what you are good at then you can beat the markets as well.
One important thing to keep in mind though.
Quality really matters and here is a quick question that you can ask yourself to measure the quality of the companies that you are or will be buying.
“Can you double down if the stock you own crashes and loses its value by 30% or more from a bad quarter or two?”
If you answer as yes and are confident in doubling or tripling down then you believe in the quality of the company and you should really double or triple down.
If you are hesitating, then you really should not have owned the company from the first place or do not buy if you never owned it before. The company should never be your long term pick. I guess you can trade it if you are good at trading (I am pretty bad at it). Great examples for this would be Valeant, CRH medical, Concordia etc… You know how they ended up…
To be honest, recent drop on CRH medical is very tempting for me but I have some doubts on several fundamental related issues. If I am not too confident in buying after recent 70-80% of stock value drop, then I may buy it as short term value creating trade pick or stay away from it completely.
If by any chance, Google or Constellation Software drop their market values by 30% or more from a bad quarter or two, I would almost likely double and triple down.
Thus for me, Google and Constellation Software are my long term holding and CRH medical is not.
Anyway let me repeat the question again for you
“Can you double down if the stock you own crashes and loses its value by 30% or more from a bad quarter or two?”
I hope your portfolio consists of many companies that you can easily answer yes to.
P.S. Do not believe anyone especially all the investing and personal finance gurus out there. Almost 95% of them do not know what they are doing when it comes to investing. I love their hard working energy and saving and investing mentality though. That may include me 🙂 so find your own investing style, take whatever you read online with grain of salt, do your own research and stick to what’s working for you. It is better to make a mistake now than later so be objective towards your investing result and do not hesitate to evolve your investing style. I honestly think all four investing styles above (index funds investing, value investing, dividend growth investing and GARP investing) are strong solid and they will get you the result you are quite happy with.
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