Don’t try to catch a falling knife!
By William Meyer
Fenestra’s mission is to help our clients experience the world. We do this by making their money grow. This month I thought I would publish a fun checklist for would-be investors. So here goes:
• Invest in businesses you understand. Keep it simple.
• Never invest on a tip. Do your own homework or find someone who does independent and objective research.
• Do not hang on to losers.
• Do not sell your winners.
• Do not invest in companies that have just discovered a cure for cancer. If they had, they wouldn’t need investors and they wouldn’t sell shares.
• Do not think a share price can’t go any higher.
• Do not think a share price can’t go any lower.
• Do not believe management unless their integrity is proven over many years.
• Beware of companies where management engages in conspicuous and vulgar spending.
• Carefully reconsider your investment in a company where insiders are selling.
• Do not listen to stock broker recommendations.
• Do not buy “turnarounds” until they have turned. This is like trying to catch a falling knife.
• If it sounds too good to be true, it probably isn’t true.
• Do not buy the next “Apple” or the next “Amazon”. There are very few start-ups that make it and even these management teams don’t know that they are going to be the next “Apple”. When Jeff Bezos started Amazon he told his initial investors that they would most probably lose all their money. Bezos is now the richest man in the world.
• Do not buy shares recommended by investment letters which say this or that stock is going up by 10 000%. If they knew this for sure they wouldn’t be selling investment letters. They would be sipping champagne in Nice.
• Do not buy the best stock in “the internet of things”.
• Do not buy the best “Pot” stock.
• Ensure that the company is run by honest executives.
• Ensure that the company has a track record of profitability.
• Ensure the operating risks are controllable.
• Check that the company has a growing market share with growing operating margins.
• Check that the company is a strong generator of cash.
• Make sure members of the management team are also significant shareholders.
• See if the company has a niche product or good product differentiation.
• Check that the company has some blue-sky potential.
South African investors must also realise the following:
1 A South African share portfolio with more than 20 shares is fatal.
2 A South African portfolio with faulty capital allocation is going to disappoint.
3 South African investors must have an overseas investment portfolio.
William Meyer is a qualified Chartered Accountant (SA) and Chartered Financial Analyst (USA). He has been CEO of Fenestra Asset Management since 1990. He lives in Mooi River with his wife Claire and their four children and commutes to his Head Office in Cape Town.
If you are not happy with your portfolio performance or would like a second opinion, contact Fenestra Asset Management for a free review of your portfolio. Cell: 079 624 4031 ● Email: firstname.lastname@example.org