Learn to Invest from the Best

by Derek Clark

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” Warren Buffett

I don’t believe in predicting markets. I believe in buying great businesses – especially companies that are undervalued, and/or under-appreciated.” Peter Lynch

Peter Lynch and Warren Buffett are two of the greatest investors of all time. So if you are looking to learn how to invest, they are good place to start. The quotes above along with some others I will share throughout this article can give you some insight into the way they think, and the way they invest. It doesn’t have to be hard. So many people are scared of the stock market these days, and that is a shame. You have to get past the media and the talking heads and the high frequency trading. Get back to the basics that Buffett and Lynch teach. Buy great companies at good prices and you will make money.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” Warren Buffett

This is an amazing thought process to have. Buy great companies and keep them as long as they continue to be great companies. The following is from One Up on Wall Street by Lynch:

The stock market ought to be irrelevant. If I could convince you of this one thing, I’d feel this book has done its job. If you don’t believe me, believe Warren Buffett. “As far as I’m concerned,” Buffett has written, “the stock market doesn’t exist. It is only there is a reference to see if anybody is offering to do anything foolish.

Do you see a trend yet? Gaming the market is not the way to make money. Trying to make a quick buck guessing what a company will do this week is not a smart way to invest. Buy and Hold is alive and well. The key is finding the right companies to hold. You can’t simply pick any company and hope to make money. You have to do your research and make good choices. The great part is like Buffett said, you don’t have to have a stratospheric IQ to be a successful investor.

Great companies are all around us. The signs of good companies, and probably more important the signs of bad companies, are pretty obvious. Good companies have earnings, and they are growing them. They don’t have too much debt. They pay a dividend. Invest in companies that are simple to understand. A great quote is invest in businesses that are so simple an idiot could run them, because someday one probably will. If you don’t understand what a company does and how it makes money, that is not a business you should be investing in.

That doesn’t mean that nobody can invest in complicated businesses. If you are an expert or have a good understanding in a complicated field, there are some things you can invest in that others couldn’t or shouldn’t. The average person should stick to simple things that are great businesses. Pepsi and Coke are both great companies. Everyone can understand what they do. They sell pop. They sell snacks. People buy them and they make money. They are great companies.

That’s the first step. Find great companies that you can understand. After that decide if they are reasonably priced by the market. If it is, buy and hold the stock as long as it continues to be a great company that is fairly valued. Now there are lots of different ways to value stocks, but going over all of them goes beyond the scope of this article. You are never going to be able to pick the absolute bottom in a stock. It is more important too avoid the top of a bad stock. If you find a company that you like and think is fairly valued, go ahead and pull the trigger. If it goes down from there, consider it an opportunity to buy more at an even better price.

My most recent experience with this was a great one. I found a company that I really like, with consistent growing earnings that I considered undervalued. It was trading at $5.50 the first time I bought it. Well, I missed the bottom badly. From $5.50 it went all the way down to $4.17. That is an over 24% loss. However, I still believed in the company, and considered this a great sale the market decided to throw. I continued to buy more on the way down, and lowered my average cost to $4.80. Currently that stock is trading at $6.30. That is 14% higher than my initial purchase, but it is 30% higher than my average cost. When the market puts on a sale, take advantage of it.

That is what Buffett talking about. Check out the market to see if anybody is willing to give you sale on great company. Other than that, don’t worry about the day to day fluctuations and high frequency trading. Over the long term, it just doesn’t matter. If you pick great companies the market can close tomorrow and open up in 5 years. When it does, the great companies you bought today will be worth more than you paid for them.

If you are want to learn how to invest, follow the best. Read any of Lynch’s books, they are all great. One Up on Wall Street and Beating the Street are two of my favorites. Another great resource to read would be Buffett’s annual reports from Berkshire Hathaway.

{ 1 comment… read it below or add one }

Chad Lyne August 1, 2015 at 11:10 pm

Derek,

I have seen some posts of yours on other financial sites and I like what I have heard. What sites do you have dedicated that I can follow you on?

Chad Lyne

Reply

Leave a Comment

Previous post:

Next post: