How to think like an investor – and not a gambler
If gambling on shares is your thing, then perhaps this blog is not for you. On the other hand, if what you want are sustainable, growing returns – over the long term – then read on. Because, below, I set out some simple steps to help you make better investment decisions.
The vast majority of people who invest in our funds have arrived at a point where the time taken to analyse businesses and calculate intrinsic value is better spent with family and friends, running their own business or pursuing leisure activities. As one wealthy investor quipped rhetorically, “what’s the point of being wealthy if you’re tied to your computer?”
The outperformance of Montgomery funds, since their inception, demonstrates that it is entirely possible to beat the market and that there is merit in researching individual company opportunities. For investors who wish to go it alone and build their own direct share portfolio, that is good news indeed. This article is all about identifying high-quality businesses and buying them for less than they’re worth.
Before we begin, it is vital to differentiate between speculating – an activity that is all too common during the COVID-19 lockdowns – and investing. Investing treats each share as a piece of a business. Speculating, however, is betting on the ups and downs of the share prices. Speculating is gambling and gamblers tend to lose. Of course, hope springs eternal and so there is never a shortage of speculators who boast of their success, no matter how fleeting that success inevitably is.
According to Benjamin Graham, the founding father of modern security analysis and the mentor of Warren Buffett, “Investing is most successful when it is most business-like.”
At Montgomery, we are not inclined to own a little piece of a business (stock) for 10 minutes if we would not be prepared to own the whole enterprise for 10 years. That disposition forms part of our investment philosophy, which permeates our entire investment framework and process.
When one starts treating shares as an ownership stake in a business, the entire approach to allocating capital changes; instead of betting on a piece of paper that wiggles on a screen, we become interested in how the underlying business makes money, how it fits within its competitive landscape, and how much it could grow by and for how long. Owning a business also changes the way you think about selling. If you owned a successful Australian business outright, would you sell it because there were concerns over who might be the next US president, or because Europe’s inflation rate had just picked up? Of course you wouldn’t.
The issue, however, is that your business is not owned outright, it is shared with thousands of other investors, many of whom react irrationally to US presidential nominations and European inflation rates. The consequences of their emotion, impatience and fear is that the price of your business changes daily, moving up and down like a yo-yo.
The key to approaching investing in a business-like manner is to prevent the daily ups and downs influencing your view of the underlying business. If the share price falls, instead of running for the exits you may want to buy more of that great business.
If the idea of investing in outstanding businesses appeals to you more than gambling or speculating on share prices, you’ll need a set of tools to help you identify and value those outstanding businesses.
And before you start employing those tools, you will need a framework. A framework is your ‘How To’ manual for those tools. At Montgomery we have distilled our framework into three components: 1) Quality, 2) Value, and 3) Cash when quality and value are unavailable.
In the two follow-up blogs, I’ll discuss why businesses should limit the amount of money they pay out as dividends, and the three essential criteria to look for in order to identify outstanding companies to invest in.
View part 2 here: THE MAGIC THAT HAPPENS WHEN COMPANIES INVEST IN THEIR BUSINESS
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
