As 2023 draws to a close much has been written about investing and much has been read about investing.
It is good to read wide for knowledge is indeed power. the pen is indeed mightier than the sword.
There are so many investment gurus that we read about and try to emulate, but we will never become them because we are all wired differently. We can treat them as mentors, but we can never become them. This is because knowledge tends to level the investing playing field, but it is the temperance and emotions that are difficult to replicate and emulate.
We can never be like another guru investor – but we can try and become our own versions of a guru investor. We are always trying to build the perfect mousetrap but are always being relegated to the drawing room to come up with a better version of our mousetrap…and a better version of ourselves in the process.
The Five Principles of Focused Investing offers a simple guide when it comes to investing. What better way to prepare for our investing journey in the new year ahead than to recap these five principles in our efforts to do better in investing.
1. In-Depth Research and Understanding: Focused investing emphasises thorough research and a deep understanding of a select number of investments. Investors following this principle dedicate time and resources to gain insights into the companies or assets they choose. This involves analysing financial statements, understanding the competitive landscape, and staying abreast of industry trends.
In-depth research provides a solid foundation for confident decision-making. We all aspire to become informed investors and strive to carry out informed investment decisions; the key recurring word is informed and that only comes with in-depth research and understanding. Time available for research is directly proportional to the size of our stock portfolio. Thus, what is required is a concentrated portfolio depending on the time available for research.
2. Concentrated Portfolio: Focused investing involves building a concentrated portfolio with a limited number of carefully chosen investments. Instead of diversifying across a broad array of assets, investors focus on a select few that meet rigorous criteria.
This concentrated approach allows investors to closely monitor each investment, understand its dynamics, and react swiftly to changes in the market or the specific company's performance.
In stock investing, it is wise to limit our portfolio of stocks to say nine stocks - about 1.0 per cent of the listed entities. Such self-imposed portfolio limitation disciplines us to choose only the best that have the greatest chance of success – a natural selection of sorts.
In a competitive game, you would only pick the best players to be on your team to increase your team's chances of success - it is no different when it comes to stock investing.
3. Long-term Horizon: Focused investing encourages a long-term perspective. Investors commit to holding their chosen assets for an extended period, allowing the investments to potentially realise their full value. This approach aligns with the idea that the market may undervalue or misprice assets in the short term, and patience is often rewarded as the market corrects itself over time.
Markets operate on demand and supply often spurred by the primary emotions of fear and greed with its consequent price fluctuations. Such price fluctuations are not reflective of the long-term value of the company. Just know that price can fluctuate, within a week or even a month, when nothing has changed fundamentally with the company - the value has not changed.
Always remember though that when the basis for an investment change, it may result in a change in the investment decision. When the reason for your investment decision is no more, there is no more reason to stay invested. And sheer hope is never a reason to stay invested.
4. Conviction and Discipline : Conviction and discipline are central to focused investing. Investors must have a strong belief in the fundamental value and potential of their chosen investments. This conviction helps them withstand short-term market fluctuations and noise.
Meanwhile, discipline is vital for adhering to the investment strategy, resisting impulsive decisions, and staying focused on the long-term goals despite market volatility. Have a methodology, improve it and it will become an iterative life-long approach for the investor.
Self-discipline is so elusive as it embraces the ultimate conflict of interest – you trying to discipline yourself.
5. Risk Management : Focused investing places a significant emphasis on effective risk management. While having a concentrated portfolio can amplify returns, it also increases the exposure to individual investment risks.
Investors following this approach implement rigorous risk management strategies to mitigate potential downsides. This includes diversification within the chosen focused investments, setting predefined exit points, and continuously reassessing risk factors.
Risks materialise in the blink of an eye. All investments have residual risks. The challenge is to keep these residual risks at a minimal level by adopting an investment approach that seeks out investments with deep margins of safety.
Focused investing is a strategy that emphasizes in-depth research, a concentrated portfolio, a long-term horizon, conviction, discipline, and effective risk management. The benefits include the potential for enhanced returns, deeper understanding and expertise, reduced costs, alignment with investment convictions, and increased flexibility. However, it's important to note that focused investing also comes with increased risk due to the concentration of assets, requiring careful consideration and diligent risk management.
Investors should weigh these factors based on their risk tolerance, investment goals, and time horizon.
*The writer has over two decades of experience in the Malaysian capital market. He is a keen follower of capital market development and is passionate about corporate governance and fundamental investing.