I’ve been an investor for a long time, and over these years I’ve learnt many lessons. Some were very painful, and some less so. Here are a few of them, which will hopefully help you to improve your investment performance. With some overlap, they fit into the two simple categories of what to do, and what not to do. Unfortunately, I don’t always practice what I preach, and often have to learn the same expensive lesson over and over again.
Things to do
One of the first things to do is to decide how much time and effort you’re willing and able to devote to investing.
How active do you want to be?
Do you want to focus on investment trusts, index exchange traded funds (ETFs), blue-chip shares, orAim companies, or spend a lot of time digging into special situations by reading regulatory filings? Each of these requires progressively more time and expertise. I’ve found that over my investing career my objectives have changed as my day job and family commitments have waxed and waned.
I remember the first share I ever bought, Warren Exploration, on nothing more than a tip from a stockbroker neighbour. I knew nothing about the market, let alone oil exploration, but he said that the share price was going to go to the moon. Unfortunately for me, the ‘rocket’ exploded on the launchpad. After some time rebuilding my capital, I tried again, this time with some of the easy money on offer with the UK privatisations of the mid 1980s. This provided me with a capital surplus, which was invested, with leverage, in a more speculative money-broking firm. Of course, Mr Market rapidly relieved me of both the surplus capital and my confidence on Black Monday in 1987. After another period spent rebuilding capital, I started investing in a mixed bag of companies with varying degrees of success until I found styles that worked better for me. Following years of compounding, my portfolio will now help me to have a very comfortable retirement.
Determine your temperament and style
Over time, I’ve found strategies that work better for me mostly by ruling out those that didn’t. While I can sometimes identify short-sale candidates, I lack the temperament to run short positions effectively and not to panic when things move against me. I’ve also found that higher-velocity strategies such as momentum trading don’t work well for me either – I’m too late buying, and generally too late selling. My style has also changed over the past few years as my capital base has increased and my number of remaining investing years has decreased. I’ve put more into managed funds – LF Blue Whale Growth (GB00BD6PG787) and Fundsmith Equity (GB00B4Q5X527) are prominent – as well as ETFs, particularly those tracking the S&P 500 and MSCI World indices. Not only does this free up time for me, but also helps protect capital by reducing ‘manager risk’ concentration in my own decisions.
Making simple rules
Making simple rules to automatically rule out companies can improve your focus. Sure, you’ll miss the odd good company, but you’ll also save yourself a lot of analysis time and many mistakes. Depending on how much time you have to do research, it might be useful to rule out sectors such as mining and oil stocks; the learning curve is just too steep. You don’t like a lot of uncertainty? Maybe rule out cyclical and early-stage companies. Striking companies off your list where the chief executive doesn’t have a material stake, or where there are no operations in the UK might also improve your success rate. Are the financials very complicated and hard to understand? Move on. I’ve also learned the hard way that any lies by management are a very good indicator of shares to avoid. Set your own tolerance level, but a profit warning only weeks after a positive trading update is an obvious red flag.
Choose your cash reserve/balance to match your style
Are you investing for time, or for opportunity? By time I mean are you willing to let the magic of compounding over many years do the work for you? If so, you may wish to be (almost) fully invested at all times. There is empirical evidence that being out of the market for the 10 best days of each year has a significant impact on portfolio returns. But if you’re constantly looking for opportunities, you may find it better to keep significant cash reserves available to be ready to pounce – and with the normalisation of interest rates in the last year this has become relatively more attractive as a strategy, earning while you wait. I’ve been running a significantly higher cash balance in the past two years.
Keep records
I don’t mean just for tax purposes, but try keeping a diary of decisions: why you bought, why you sold, or even why you chose not to take action upon seeing something happening in the market. Over time, this builds not only into a database where you can identify errors in thinking on particular investments, but you will also be able to see broader applications of your thought process. I can see patterns emerging by looking at my historical transactions and trading notes.
Be lazy
Or call it being patient. Compounding is one of the wonders of the world, so let it work for you. Terry Smith is a big proponent of buying quality companies, doing nothing (ie, not trading), and waiting for the power of long-term compounding to take effect. Another benefit of being lazy is lowering fees and costs, which can have a significant effect on portfolio value – 20, 30 or 50 basis points of trading costs annually (0.2 per cent to 0.5 per cent) can really add up over time. Check also that brokerage costs, including platform fees, are appropriate for your account type and size.
Work with others
Investing can be a lonely business, but it doesn’t have to be. Find an investor group or club, and exchange ideas. Not only should your investment performance improve, but you’ll make some new friends along the way. ShareSoc (www.sharesoc.org) does a lot of good work for investors; they offer both associate and regular memberships. Regular membership entitles you to all sorts of benefits, company meetings and newsletters, and ShareSoc also gives access to Signet, which is an umbrella organisation for many small groups of private investors around the country. I’ve recently joined a local group. Companies will also have meetings for shareholders and prospective shareholders, which are mainly online these days. While I’ve often attended face-to-face events ‘to see the whites of their eyes’, the trend towards online company meetings has broken down geographical barriers and made them much more accessible for non-London-based investors. Various online events are organised by the Investors' Chronicle, Investor Meet Company, PI World and Mello (which also does face-to-face events).
Read and research
There are a lot of resources around, both free and paid for, company-specific and more general. Important company-specific information appears via RNS (Regulatory News Service) on the London Stock Exchange website and others, and company websites are usually a rich source of information as well (and there will often be a link to company results presentations, both live and recorded). Freely available investor letters from renowned fund managers are useful as well, and give insights into both the market generally and reasons for including specific companies in the portfolio. The annual Fundsmith letter (each February) and presentation is highly recommended, as are communications from Blue Whale.
Hedge funds, institutional, and private investors often post useful commentary on X (formerly Twitter) and their own websites. Companies frequently run Youtube channels explaining about the company, products, and services.
Follow the leader
This works both ways – if you see a company prospering, and that chief executive or chair moves to another company after a takeover, their new company is almost certainly worth a look. And of course the opposite is also true. The chief executive of a serially underperforming company is quite likely to underperform at the next business they join.
Watch company-specific details
This can include a lot of things that can bite you, such as egregious compensation schemes, related-party contracts and regulatory risks, which can wipe out the business model at a stroke. These can often be discovered in the annual report and similar documents. Other things can also give pause for thought. On 21 February this year, the chief executive of Bytes Technology (BYIT), resigned with immediate effect, confessing that he’d made 119 trades in company shares without disclosing them. It then emerged that he made a further 15 trades on behalf of his wife in that period as well. One has to wonder whether this was an isolated failure of ethics and/or controls, or whether the problem at the company is more fundamental.
Less obvious company-specific details include delisting risk. I’ve seen several companies in my portfolio delist in the past year; frequently mentioned factors are dominant shareholders, excessive costs and regulatory burdens of listing. It can cost a company several hundred thousand pounds in direct and indirect (management) costs to remain listed, which can be prohibitive for a small company.
Watch for complexity
Some companies have complexities that are not apparent at first glance. This can be management contracts with unusual or onerous conditions, or assets that are either difficult to value or valued in an unusual manner. Unless you’re confident in your methods and in understanding the risks, it’s often best to take a step back from these companies.
Run your winners and sell your losers
Time and time again, I’ve learned the lesson that if a share goes up for good reasons, unless those reasons change it’s likely to continue to go up. Three of my top five positions got there by multibagging from where they were purchased, and I see plenty more to come over the coming years. And conversely, if a share disappoints for a reason and there is nothing more than hope that that reason will change, it’s time to say goodbye and move on to a more promising company.
Don’t do these things:
Don’t overtrade
By focusing on your stock selection metrics, you’ll be able to minimise trading. Not only does this lower trading costs, but means that you’ll have made more careful selections, which are more likely to outperform. It’ll also save you time in finding a replacement investment for the one sold.
Don’t repeat your own mistakes
Make note of your mistakes and how they happened: Were you overoptimistic? Did you fail to notice regulatory risks or customer concentration? Each mistake is a learning experience.
Don’t dwell on mistakes
If you determine that your thought process on a share was wrong, sell and move on. I heard Lord John Lee make this point some years ago where he mentioned the psychological impact of not selling a share where you’ve got it wrong, saying that it pricked you a little bit each time you saw it. Of course you’ll make many, many mistakes in an investing career, but dust yourself off and move on.
Don’t be too early
Some of my costliest mistakes over the years have come from identifying good growth stories, yet investing too early. The story will always take longer, market take-up will be slower than forecast, costs will be higher, and further raises will be required. One of the largest incinerators of my capital over the years has been a company with groundbreaking technology and a fantastic blue-chip order book. As Warren Buffett has warned, “you pay a very high price in the stock market for a cheery consensus”. Brokers have downgraded expectations twice for each of 2019 and 2020, four times each (!!!) in 2021 and 2022, and three times in 2023. In this time, the company has been back to the market four times for further funds, nearly tripling the share count.
Don’t overuse leverage
While there will always be very vocal people on social media who claim to have made a ton of money leveraging up, there will be many more who incur significant losses and say nothing. Leverage can quickly decimate your capital, particularly in smaller stocks or during market dislocations. And even if it doesn’t, the cost of borrowing quickly mounts up and eats into your returns. After my leverage experience in 1987 where I lost all my then-modest capital, I’ve always been reticent to use borrowed money, and in recent years have never been higher than 115 per cent invested (that is, 100 per cent of capital and 15 per cent of borrowing to fund a net long position of 115). But in the past two years I’ve moved to a net cash position. Not only does it reduce portfolio volatility, but leaves a cash buffer to move opportunistically and now yields a meaningful amount of interest to boot.
By following the ideas above, you can help tilt the odds in your favour. Of course you’ll have missteps, but many of the greatest investors don’t win on much more than 55 per cent of their picks. The money is made via knowledge of what works for you, sticking to a process, minimising costs and letting the compounding work for you, and letting your winners run.
You’ll need a little bit of luck as well, so best of luck to you.
Mark Lauber has been an active private investor for many years, now managing a small family office focusing on small-cap, private equity, and special situation investing. Previously, he worked in the City structuring interest rate and credit derivatives in the UK and internationally. He served as a director at ShareSoc for eight years.
