My Core Investing Principles
Hey everyone, welcome back to another edition of the 5i Research newsletter. In this post, we are going to go back to the fundamentals of investing and review some core investing principles.
Let’s dive in!
Avoid Concentrated Risks
Don’t make a portfolio reliant on a single stock. If the last year has taught us anything, it is that no matter how well an investor knows a company or how confident one is in it, it can still go down. Even if the fundamentals and results are fine! Having too many eggs in one basket can cause a lot of problems that are hard to bounce back from.
The Importance of Rebalancing
Be sure to rebalance. Similar to the above point, as certain names become a larger portion of a portfolio, make sure to consider rebalancing holdings (i.e. selling some winners, adding a bit to losers or new names). This helps avoid allowing any single name to become too much of a weight in a portfolio but also allows some gains to be taken over time. Meanwhile, it allows more cash to be put elsewhere as winners are trimmed. When stocks are working well, it is easy to feel confident and let a position run. Rebalancing helps to keep some overconfidence in check and ensure position sizes are being managed. There are numerous ways one can rebalance. How it is done is probably less important than the act of just rebalancing in some fashion.
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‘The Stock Market is a Device For Transferring Money from the Impatient to the Patient’
Keep the long-term in mind. The last year has done a good job at making investors laser-focused on the next quarter and even just the next monthly macro datapoint. It always helps to remember that at the end of the day, the basic principle behind investing is that you are purchasing ownership of companies. Companies aren’t built in quarters and a higher interest rate probably doesn’t (or shouldn’t) change the math a whole lot on great companies. This doesn’t mean to ignore these other issues and risks but sometimes companies need to be given time to ‘breathe’ and grow.
Due Diligence Involves Multiple Sources of Information
One investment research tool does not solve each and every problem. One should use multiple sources of information for conducting due diligence on an investment. As always, investors need to ensure they are doing their own due diligence on names and are comfortable with what they own and why they own it.
‘The Best Time to Plant a Tree was 20 Years Ago - The Second Best Time is Today’
The stock market has been in existence for roughly 230 years, and throughout history, it has gone up and to the right. Yes, there have been long periods of sideways price action or severe volatility, but largely the market has been a great source of wealth creation and preservation of wealth for centuries. If any individual were to be asked whether they would have liked to buy stocks 20, 30, 50, or 100 years ago, the resounding answer would unequivocally be yes. This is why we think that regardless of the present-day fears of the market, recessionary concerns, and rising interest rates, investing in the market over time has proved to be a good way to escape an eroding purchasing power from the effects of inflation.
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