Lighthouse is running a two-week-long series in which we share some of our principles of investment. All you need is an open mind and a few minutes each day. You can keep tabs on the action at the Principles of Investment index.
Firstly, we should accept that risk in any investment is inevitable, whether this be high or low. Much depends on your ship being capable of dealing with ever-changing sea conditions throughout your journey. A sail-boat may not get you there very fast, but it will fare much better than a speed-boat in heavy seas and storms. So be sure that your investment tactics define your market positioning, and not the other way around, else you could find your speed-boat fighting a storm it is ill-designed to survive.
You do therefore need to decide what kind of investor you actually are (and not what you wish to be):
- Speed-boat. Here, you try and ‘beat the market’; where you employ frequent buy/sell trading activity and stay close to shore, ready to dash to port at the first sign of rain. Bigger gains can be had by venturing further into deeper water and out of sight of land (but at greater risk). This takes skill, a strong stomach, and lots of time doing research. Frankly, this approach only works for about 5% of investors, and most of these are ‘professional’ investors. The other 95% invariably lose money or ‘lost at sea with all hands’.
- Fishing-boat. Here, you let the wind (the markets) define your course and compensate by buying a range of different stocks using buy-and-hold tactics. The principle here is to have a fleet of boats dropping their nets in various places. Some will find fish, and some not. Fishing boats are better equipped to survive storms, but do depend solely on their engines. Some/most of the fleet will survive a heavy storm, even if they don’t always catch or keep the fish. This works for about 20% of investors. You still need to spend a good amount of time doing your research each time, but you don’t need such a cast-iron stomach.
- Sail-boat. Here, you use the wind to propel your boat, but you have a small engine to help you if the wind is sending you off course, or the wind stops. You may not get there as quickly as you would in a speed-boat, or find as much fish as a fishing-boat, but your sail-boat is designed and equipped to survive and prosper in most storms. This works for 75% of investors because daily/hourly activity is delegated to professional investment managers (mutual funds) who have big research teams, since most investors do not have the expertise or time to try and ‘beat the market’, or the resources to have a big enough fishing fleet.
Next Friday, we’ll wrap it up with “Part 5 – How quick? Manage the risk appropriately”. If you liked this article and wish to see “How” we deliver this for our clients, do give us a buzz, we can arrange a personal introductory discussion with one of our consultant; after-all, this is the point of this blog, helping you 
