There are a million ways to invest in the stock market, and a hundred different approaches for every one of them.
At 7investing, we’re casting a wide net to capture the market’s best opportunities across a wide variety of industries and styles. But we are generally guided by seven principles, which serve as a higher-level roadmap to help investors maximize their returns over time.
The world is filled with many great financial advisors. They show sincere attention to their client’s goals, and make allocation decisions to achieve them while also managing downside risk. We see the value of financial advisors, and believe their long-term guidance is actually quite useful for the majority of people.
But there’s also something else that we believe as well. No one cares about your money like you do.
Just as an attentive nanny will never care for a child quite as carefully as a mother, financial advisors will never care for your future well-being quite like you.
Only you can truly know your specific financial goals. Only you can truly know your risk tolerance. Investing is a personal thing, and we believe you should ultimately be the one overseeing it all from the helm.
We’re here to offer our guidance and support on how to do so. With a little time and effort, individuals can significantly outperform broader-based funds and stock market indices. You can do ‘this investing thing’ on your own terms, with better returns, and with your own personal style.
Buying a stock represents taking an ownership stake in a real business. Each additional share you own gives you a stronger voice in how the business should be run.
Every time we make a recommendation, we also consider it as becoming a partial owner of a business. We want to invest in good companies that are run by people we also consider to be “good company.”
That means looking for leadership teams with a track record of success and a bigger-picture strategy of how to profit from opportunities that arise in their market. The decisions they make will directly impact on our long-term investment returns.
We also keep a close eye on their executive compensation, to know what specific things those leaders are getting paid to accomplish – and to ensure their interests are aligned with ours as shareholders.
We want to invest for the long haul, into great companies with great leaders who can compound our capital for years.
We hear often that the stock market is “too stressful”. Rest assured, it doesn’t need to be that way. By following a few simple rules, you can avoid many common investment traps and the unwanted stress that goes along with them.
Only invest money in the stock market that you won’t need for at least three years. It’s difficult to predict what stocks will do in the next few months, since headlines tend to affect investors’ emotions. But the impact of those short-term news stories rarely lasts, whereas great business execution can endure for decades. Extending your timeframe will maximize your likelihood of generating better returns.
We also avoid using “margin” debt at all costs. Borrowing money to invest in stocks might be tempting to juice returns, but can turn badly very quickly if the market unexpectedly falls. The potential upside isn’t worth the risks.
Investing is meant to be a long-term wealth-creating process, not a day trip to a Vegas casino. Setting your expectations upfront of saving for long-term goals will greatly improve your chances of success.
Warren Buffett is generally considered one of the greatest investors in modern history. When asked why more people didn’t simply copy his strategy that has led to enormous success in the stock market, Buffett famously replied, “Because nobody wants to get rich slow.”
We agree with Warren on this one. Investing can make you rich, but it takes time. Stocks are tied to businesses, and businesses need time to grow. Like Einstein, we believe compound interest is one of our world’s true wonders, capable of building incredible wealth over sufficient time. Use this time wisely. Save as much as you can. Re-invest dividends to buy more stock.
When buying and holding individual stock positions, time is the individual investor’s greatest advantage. There’s a lot of money chasing after short-term results, and many investors are obsessively focusing on just the next quarter’s earnings.
We recommend taking the long-term view instead.
The best businesses deserve premiums. But valuations still matter.
Many stocks we recommend might look expensive at first glance, especially when using traditional valuation metrics. That’s because companies with durable, competitive advantages can usually drive profitable growth through higher margins over longer periods of time than its peers. Both characteristics can fetch companies a premium price, while still making them an excellent value to long-term investors.
We believe that earnings growth is the primary driver of stock price appreciation. As Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
That being said, when enough future earnings growth is baked into the company’s current stock price, it can make further appreciation very difficult, making it unlikely to achieve market-beating returns. There is a price too far for any company, no matter how great its total addressable market or future earnings growth potential.
Stocks represent ownership in a business, and good businesses are built upon the ability to generate profits. Those profits don’t come free though; they must be earned by doing things differently or more effectively than what’s already available. We want to invest in companies with sustainable competitive advantages.
Competitive advantages, often referred to as economic “moats”, are what protect companies and castles from those attempting to invade them. Examples include patents that grant exclusive intellectual property rights, recognizable brands that customers love and repeatedly buy from, or products that become so familiar that it would be costly and time-consuming to switch to something else.
These are the things that allow companies to charge higher prices and generate greater profits. Over time, strengthening advantages tend to shield companies – and their stock prices – from competitive threats.
Know why you own what you own.
Even the greatest companies will occasionally experience a drop in their stock prices. If you don’t know why you own a stock, you might be influenced to sell at the worst possible time – when the price is falling and the panic is widespread.
Write out exactly why you’re investing in a company and the specific things that will tell you if it’s doing well or poorly. The more quantitative and company-specific, the better. Use this as the standard to objectively evaluate the business when its stock price is falling.
If the buy thesis is still intact, it will let you hold or even add with confidence during these drops. And if the original thesis no longer holds true, it might very well be a good time to sell.
A strong thesis will guide you from the emotions that run rampant throughout the market. It can keep you from irrationally selling or blindly holding.