Monday 17 August 2015

Keep Things Simple

Investing can be complicated at times, trying to understand the different aspects of a financial statement, following the many different pieces of news that could adversely affect different industries. With most of us having day jobs and unable to spend a large portion of our time, wouldn't it be best for us to simplify investing?

(Image source: https://www.flickr.com/photos/gdsteam/14064123625)

Investing in industries we understand

This could be an industry that you are currently working in or are familiar with many people in the industry. Having a good grasp of the fundamentals of the industry and the better players is very beneficial and you will have to do much less research as you already have a relatively clear picture of the prospects of the companies in the industry and their relative competitiveness.

Taking two steps back (looking at the bigger picture)

Instead of being bogged down in every piece of news that comes out from the companies, eagerly awaiting each new deal that the company gets or analyzing thoroughly each quarter report that comes out, it may be a good idea just to take a step back and look at the big picture. If you're a long-term investor, one small new deal or one particularly fantastic or dismal quarter is not going to affect your investment decisions greatly (unless it happens to affect the share price, which may make it a better or worse investment)

Picking understandable companies

Choosing to invest in companies with easily understandable business structures and financial statements can help to keep things simple as we're clear on the factors that would affect the performance of the company and also have a good idea of the company's financial standing. Some conglomerate with businesses in many industries may be difficult to comprehend as it's difficult to estimate the impact of any significant new development.

Diversifying

Whether it's done through owning an index fund or through holding many different different companies of your choosing, diversifying your portfolio into different industries and different countries (maybe owning index funds of other countries to get a cross-section) will reduce the risk that you take on each individual company. But it isn't a good idea to diversify your holdings too much such as any good companies that you may have chosen would have its effect on your portfolio diluted by other underperforming companies.

Value Investing

This is not as complicated as it sounds, picking companies with intrinsic values higher than the price we are paying for them. The most complicated part of that sentence is to deduce the intrinsic value of the company. There are a few ways for us to deduce the intrinsic value of a company, which include the Discounted Cash Flow Model and the Dividend Discount Model. Stable companies with a good position in their industries are likely to be able to weather out storms and their value would be easier to determine

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1 comment :

  1. Thank you for sharing the article. It's vey useful. Hope to hear more from you.

    ReplyDelete