Friday, 18 November 2011
Top 3 Investing Secrets to Avoid Volatility
You have probably had at least a few different apple pies in your life. Some good, some great, and if you are unlucky, some absolutely terrible. The ingredients are essentially the same - apples, flour, butter, sugar - but the outcome can be substantially different. Investing is oddly like an apple pie in that many people have a very similar criteria when selecting them, but small nuances in their selection process has drastic results on the outcome.
In this post, I will release some of my "secrets" in that really aren't so secret, in fact, they are actually quite obvious. Although quite ingenious, I can't take credit for them. I still remember when they were introduced to me. In their simplicity, I was left thinking "why didn't I think of that?".
Secret number One - Get Quality Security
This one is short and simple. Don't invest unless you have a margin of security. Take note in how the banks invest their money. They don't buy stocks or mutual funds with it, that would be ridiculous - they would only do that with someone else's money ;). Instead they lend it to companies with ongoing revenues, sound business plans and most importantly - assets that they can hold as security. They truly understand how the priority of claims work and it shows. As an investor, you should be doing the same.
Secret number Two - Invest where you can add value
If I invest, I want to share in someone's smart management AND add value. Buying stocks, funds or bonds in the traditional market, is just giving to some random person - not to the company who can use my capital to create something more. Buying units from another person (as opposed to buying them from the company itself) doesn't offer anything to the company. It's almost like getting something for nothing (which is one of my red flags). Instead, look for outstanding organizations where your capital can enrich the company you have chosen - it will amplify your investment return and create a win-win situation.
Secret number Three - Performance based investment management
Greed can push even the most honorable people to make decisions in their favour at the expense of others. Madoff, Jones and many others had a doorway open to them that they just could not resist. In another life, they may have been honest people - but for many, the temptation is too great. Performance based management introduces a structure where management is rewarded in the same manner as the investor. Usually the management will take a minimal fee to cover basic expenses and costs while the bulk of their pay comes at the end in the same form as the investor. If structured right, the management only gets paid if they do well. Take a look at your fund statements from the last year - was your manager winning while you were losing? If your answer is yes, then performance based fees may be for you.
Over the last few years the markets have been compared to Mr Toad's Wild Ride. I have watched portfolio's that remained constant and steady, and these 3 secrets were the common ingredients.
If I gave you a hankering for apple pie, I apologize. To make it up to you, you can either make your own, go to Vi's for Pies, or give me a call and I'll buy you a piece as we talk about how this process can increase your returns and decrease risk and volatility.