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One of the golden rules of investing, as opposed to speculation, is to spend significant time really understanding what you are buying. You should not be basing decisions on a “tip” on the assumption that the person who gave you the tip “seems to know what they are talking about”.
You must do the required investigations so that you grow in confidence concerning the company.
Also, you should not be investing in sectors that are impossible to be analysed by the ordinary person.
Sure, if you have spent years specialising in the technicalities of bio-technology or quantum computer – perhaps you have a PhD in one of those areas – by all means choose the future winners in those fields.
But most of us wouldn’t have a clue. Nevertheless, there are thousands who are willing to take a punt in their ignorance, “There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it. Shun the enterprise round the corner, which can at least be observed, and seek out the one that manufactures an incomprehensive product” (Peter Lynch).
Warren Buffett tells us to step over one-foot hurdles rather than keep trying to jump six-foot ones – some companies are relatively easy to analyse. Unlike in Olympic diving there are no extra marks for increasing the difficulty.
I know, I know….thinking and analysing is hard work and absorbs a lot of time. But it is that effort which separates you from the crowd.
The crowd consists of the type of people condemned by Bertrand Russell many years ago “Most men would rather die than think. Many do.”
Here are two other thoughts on the roll of thinking and analysing in an investment programme:
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
Warren Buffett
“Unlike the Lord, the market does not forgive those who know not what they do.”
Warren Buffett (B.H. 1982)
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
