At the time of writing I have had just under 22 months’ experience of fund management and what a roller coaster ride it has been so far. With hindsight launching a fund on 16 April 2018 wasn’t the best timing but I have no regrets.
So, what have I learned so far?
Well by far the biggest lesson is that you have to think and behave in a manner which is not natural as a human being. By that I mean that all of the normal human failings of greed, fear, risk-taking, caution, emotion, errors of judgement, irrationality, impatience and so on have to be controlled and replaced by a dispassionate, logical and unemotional attitude backed up by sound research, excellent analysis and shrewd judgement. You almost have to become inhuman as odd as that may seem.
I have learned that the best approach to share buying is a value investing one. There are three core elements to this investment approach.
- Calculate the intrinsic value of the company and only buy the shares if the market price is lower than its intrinsic value. Sell the shares when the intrinsic value becomes lower than the market price of the shares.
- Buy shares in companies which have a sustainable competitive advantage or a “moat” around them.
- Ascertain whether or not n the company is manipulating its earnings by comparing its earnings per share to its free cashflow per share over a 5 year period. If the company’s earnings per share is significantly higher than its free cashflow per share year after year that is the warning sign that the company is probably manipulating its earnings. Avoid buying shares in companies like this.
Use great software to thoroughly research shares as it saves you a huge amount of time.
Search for companies that generate high cashflow from operations and are flush with cash. Such companies are able to sustain the payment of high dividends including special dividends and can become takeover targets.
Assess the liquidity of the company’s shares. Even a company whose shares are listed on the main market of the London Stock Exchange may lack liquidity if its trading volumes are low.
Watch out for the dates of earnings announcements especially half year and full year results and dividend payment dates. Share prices, especially for smaller companies, can be significantly affected, up or down, on the dates these things are announced.
Look for companies with low price earnings ratios and high returns on capital employed. Such companies tend to outperform the market.
Last but not least monitor the shares regularly and don’t be afraid to sell if the timing is right. You know it makes sense.
