Saturday, February 26, 2011

The best investors KISS and understands

I think it was Peter Lynch that once said something along the lines of “if you can’t explain to a child the reasons why you want to buy a certain stock or make a certain investment, then you should probably rethink the decision to make that investment.” And I think that it was Warren buffet that said something like “if you can’t make a decision to invest in 5 minutes, you can’t make a decision in 6 months.

These 2 values of keeping things simple and understanding any investments that you commit yourself to are, in my opinion, an essential part of any great investor. After all, there are not many things that you need to look at when determining whether or not an asset would make for a good investment; there are crucial things to look at such as competitive advantage, price, return on equity, and a few other things when evaluating the investment appeal of a company’s stock, but there aren’t many of these crucial things. By keeping things simple, ignoring the noise, and looking out for the things that matter, we can make much better investment decisions.

It is through understanding that you can tell within minutes the reasons why an investment has the potential to produce good returns. If you can’t tell within a few minutes if a company would make for a good investment, then you don’t understand the company, and if you don’t understand something, you shouldn’t invest (gamble) in it.  By knowing which companies have the potential to do well, and which don’t, we can also save a lot of time by researching only the companies that have good prospects. The returns we enjoy would very probably also improve, as we are now only valuing assets that we understand and that have potential to produce attractive returns for us.

By keeping things simple and understanding what we’re doing, we will not only be able to explain to kids the reasons why we make an investment or decide, in a matter of minutes, if an investment is worthwhile researching, but more importantly, our returns could improve significantly, and our risks will be reduced.

So, understand what you're doing and always remember to tell yourself to keep it simple stupid (KISS). There is so much more value in kissing your girlfriend/boyfriend whom you love and understand than a meaningless kiss in a one night stand; the same concept applies to investing.

Thank you for reading, and may you always sustain good returns on your portfolio. Take care.