Just One Stock for the Rest of Your Life?
OK, try to imagine you can pick out only one company’s stock and that all your savings and investments will be pumped into this stock over the years. You’re allowed to take the dividend yield, obviously, and you’re allowed to sell some of the company’s shares when you need some capital for something or other – but otherwise that’s it; just the one.
Now imagine, too, a few conditions, namely that the stock has to cover off your pension, whether now or in the future, and you can’t include any kind of collective investment like an Investment company, or trust or a Unit Trust. So all those of you who were thinking “Berkshire Hathaway is the ideal thing” have to think again!
Now of course this is a hypothesis, no rational investor would ever follow the advice in practice. But at the same time, the founder of the aforementioned Berkshire Hathaway, Warren Buffett once said – investors should act as if they had lifetime decision cards with only 20 punches on them and with each investment decision they make, the cards are punched, and there are fewer available for the rest of their lives – or words to that effect anyway.
What the great investor meant by this was that investors will generally enjoy superior returns if they select a relatively small number of shrewd stocks.
by 401(K) 2013
What if you really did have all your eggs in one basket?
Anyway, the discipline this kind of hypothesis imposes upon our decisions is both an interesting and helpful one. Warren Buffett also once said that you should think like you’re buying the whole company rather than just a few shares in it. And the same hypotheses should go for whether you decide to take long-term investment decisions for retirement or you’re spread-betting on the intra-day movements in individual stocks; the principles are the same. If your starting point is a resistance to losing money, you’ll tend to do better. This may sound obvious but it’s staggering how many people spread bet or invest like it’s a lottery.
At Tradefair, for example, there are online tutorials explaining ways to limit your exposure. If you visit the site, you’ll also see that you can practise online in a risk-free environment trying out different trading strategies to see which you can make work for you before inputting any real cash.
So the discipline imposed by our hypothetical “one stock and one stock only rule” is helpful for those of us looking at equities, as the principles should be absolutely no different whether you’re investing for the long term or placing what you hope will be a short-term spread bet. You won’t win them all but you should win more than you lose and come out ahead on that basis.
But what should you look for, exactly, in that one stock approach?
Hands up if you can think like Warren Buffett
Look for the kind of characteristics that have been shown time and time again to work well in the market over time. The ideal companies would be growing at a reasonable rate and should be able to show good basic value credentials including lower than average price-to-earnings ratios, good cash-flow and a strong balance sheet. Ideally, these companies would also have a good history of steadily increasing both earnings and their dividends and should supply truly essential goods or services and have a defensible position in doing so. They should have a lower than average enterprise values to sales ratios when compared with their peers.
Even more importantly, they should be trustworthy and prudent – though admittedly this is often harder to judge.
This is a great way to approach investing if you have the self-discipline it takes.