Having a philosophy, and a strategy for implementing it, reduces the problem of what to invest in to a manageable size. Our columnist explains his own principles, values and beliefs that underpin it.
If you think about the task we set ourselves when we try to make money in the stock market, your head might explode.
There are thousands of companies listed in London employing millions of people. Each business has its own way of doing things, and is buffeted by external economic, political and cultural forces.
The stock market is a galaxy of opportunity, or perhaps a wormhole of booby traps.
We think we can work out the best opportunities and avoid the booby traps, but were we to compute all the permutations it would probably take thousands of lifetimes (or, more optimistically, a quantum computer in about 25 years' time).
ChatGPT, the conversational artificial intelligence making the headlines, cannot do it. I have asked.
What I think about when I think about investing
I chart a safe course through the galaxy/wormhole by making sure my decisions conform to an investment strategy guided by a particular way of thinking. The word philosophy sounds a bit grand, but let us run with it.
Having a philosophy, and a strategy for implementing it, reduces the problem of what to invest in to a manageable size.
My strategy is embedded in the scores I give shares in the profiles we publish on interactive investor, and it is explained in the FAQ linked at the bottom of this page, but I have never written about the principles, values and beliefs that underpin it.
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I carry them in my head. They are personal and I worry they will seem trite on the page. That said, since we broadcast my decisions, it seems proper that you know where they came from.
Besides, our readers are perspicacious, so you have probably worked out much of this, and will appreciate it is a first draft of thoughts too nebulous to express adequately in type.
Invest in people
A business is a group of people organised to make a profit, and the idea I keep coming back to is that we invest in people.
The biggest business in the Share Sleuth portfolio is Next (LSE:NXT), the fashion retailer. It has nearly 50,000 employees. At the other end of the scale are companies such as Quartix Technologies (LSE:QTX), which sells a vehicle tracking system and employs less than 200.
The business that employs the most people is reportedly Walmart (NYSE:WMT). More than two million people work for the US retailer, which is an incredible thing.
Size means nothing if those people are badly organised but, assuming I have picked good companies, the Share Sleuth portfolio consists of perhaps a 100,000 people organised into 30 or so money-making machines.
They are specialists in what they do, and collectively they stand a much better chance of navigating the galaxy/minefield than I do.
Investors often focus on how much to pay for a share, but it is a secondary factor. If the people are not right, the price is irrelevant.
Trust them to make money
When we buy a share, we are buying the right to a share of the surplus income, or profit, produced by these people. Our expectation is that they will be so successful that the money returned to us over our investing lifetimes will be far in excess of the money we put in.
In other words, we trust those people to make money. This requires us to understand how they make it, how they plan to make more in future, and what obstacles could get in the way.
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The best source of this knowledge is annual reports because that is where companies are legally required to explain themselves. Regulations and conventions exist to make sure businesses tell us what we need to know, even when they might not want us to know it.
Reading an annual report is a voyage of discovery, and I hope to discover coherence: a business building on its strengths and addressing its weaknesses.
Through thick and thin
The investments companies make to grow their profits take years or even decades to mature and, as we have been reminded in recent years, unanticipated events intervene.
Instinct tells us to react in these situations. We can solve the problem of a pandemic, or a recession, or a trade war, by trading.
The advantage we have in this situation is speed, but if our instincts are wrong we will be making the wrong decisions very fast. People within businesses take longer to react but if we have correctly identified good businesses, their decisions will be more reliable.
They will also have already made good decisions. The companies they operate will have strong finances, warm relationships with employees, customers and suppliers, and products customers need. These things help them to profit, even in difficult circumstances.
Good businesses will probably have adapted before.
The most obvious reason to invest is to build sufficient income-generating power, so one day we will not have to work, but the companies we invest in also shape the world we live in.
They solve problems and make life better for people, they entertain us, they provide employment and make us wealthier. But some companies bully staff, harm customers, gouge suppliers, stifle innovation, pollute the environment and lie to shareholders.
That feels reprehensible, but it is also unsustainable.
Extracting the most out of people and society while giving us the least possible in return may increase profit in the short term, but it breeds resentment, attracts the attention of regulators and lawyers, and can make life more hazardous for us all.
Knitted together into one phrase, my philosophy is: “To invest in people and trust them to make money through thick and thin for everyone.”
Although it is a catchphrase I have never used before, it is, I think, an accurate distillation of what I think about when I think about investing.
It guided me to invent a method of scoring and ranking and ultimately valuing shares, my Decision Engine, which focuses on five factors: profitability, risks, strategy, fairness and price.
In turn, the Decision Engine guides my trades in the Share Sleuth portfolio.
On the subject of people, there is another set of people I hold in high esteem, you, our readers (especially if you got this far).
Richard Beddard is a freelance contributor and not a direct employee of interactive investor.
Richard owns shares in Next and Quartix.
For more information about Richard’s scoring and ranking system (the Decision Engine) and the Share Sleuth portfolio powered by this research, please read the FAQ.
Contact Richard Beddard by email: email@example.com or on Twitter: @RichardBeddard
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.