I had dinner last week with a good friend of mine and one I’ve shared a fair few investments with over the years. Back in the heady days of the dot.com boom we were happily sharing ‘hot tips’ and were often found pooling our meagre student resources to take a punt invest in some random company or other, with varying degrees of success.
Fast forward 15 or so years and we’re both working for banks, neither of us in ‘risk taking’ roles, but both are regularly exposed to all sorts of different views on investment strategy. During our meal the conversation inevitably turned to investments, as it usually does.
It turns out our investment paths have diverged quite significantly over the years. After I launched into my usual speech about slow and steady ‘defensive’ ships such a Unilever, the relative merits of passive investing, indexing and being less emotional about my investing I looked up from my meal to see him shaking his head and taking another pull on his wine.
“That’s all very well but I’m never going to get rich from a 3% dividend” said he.
Now I’ve not seen his investment balance sheet….and neither has he it seems. It transpires he doesn’t have a clue what his annual returns have been or are. He’s “well up” on Netflix, “got stung” on Twitter and “doubled up and then down” in commodities, whatever that means.
What stuck me was how our approaches to investing have diverged over the years. His approach seems incredibly similar to the one we both used to follow years ago:
- Focus on emerging technologies
- Buy into an idea/story about future/potential revenue streams
- Don’t worry too much (or at all) about current financials
- Make small(ish) investments in such companies in the hope of hitting a gold mine every now and then
Now lets compare this to my current strategy:
- Focus on established/mature industries
- Concentrate on companies with long established growing revenue streams
- Focus on simple, robust, consistently good financials
- Make large(ish) investments in selected companies and diversify concentration risk via cheap index funds/etfs
What is clear from the above is that my investment strategy has changed significantly over the years, and continues to do so. The more I develop my strategy and add more and more criteria to the investments I make the more confident I become.
Based on our conversation it would certainly appear that I am more relaxed than he is about the respective approaches we’re taking. He appears frustrated with both his strategy and his inconsistent results, making him wary of committing more capital.
On the other hand I feel perfectly content with my strategy. While it is always being tweaked and refined, should another recession/crash happen tomorrow I wouldn’t be overly concerned with a 20/30% sell off and I would certainly remain confident that my chosen investments would not fall as far as most and have a strong chance of staging a quicker recovery. In fact I’d view such an event as an opportunity to buy cheap assets.
Actually thinking about it further I’m not so sure he has a strategy at all.
How has your investment strategy developed over time?
Really interesting article. I agree with you. When I first started I put a little bit of my investing money into pure growth plays (which I still hold, both down quite a bit). It was chiefly an experiment to see what investing “style” suited me better. It certainly did that!
Dividend growth investment hits the mark for me. As you say, the ability to look at price drops and think “great, I can add more” (as long as the fundamentals are still sound, of course) is excellent for peace of mind.
And seeing the slow but sure progress of dividend income (even on stocks which are showing capital losses) is great for keeping you focused on the long-term and willing to continue directing cash in that direction.
Thanks again for sharing your thoughts.
Dividend Drive,
I think it’s a path many investors take. What is surprising, and what I was trying to convey in the article is how many people invest with no clear strategy. Seemingly intelligent people not looking to improve their approach, learn from mistakes or strive for progress.
That definitely comes across. You’re spot on. Even the most basic strategy formulated early on is important in providing a skeletal structure for how you want to achieve your aims (aims obviously being critical to any strategy).
However, as you say, a strategy (no matter how simple or convoluted it is) only works when it is allowed to evolve with your experience. If it doesn’t it just becomes an increasingly dry and directionless dogma!
I have passively invested, both my own and my wife’s DC pension. In my wife’s ISA I buy FTSE 350 dividend payers with a low beta using the £1.50 regular investment plan.
In my ISA I am trying out Stockopedia’s QVM strategy (mostly in UK small cap) – This is not advice!
I started off buying a few high yielders. I understood the power of dividends from the beginning, but I didn’t really check things like dividend cover and anything else sensible like that. Over time, I’ve developed around 8 criteria that I use to screen my stocks, then I investigate them a bit further to see what’s good value to invest in, according to which sectors I need to balance my portfolio.
I must admit though, I do still do the occasional ‘growth play’ but this is based on news announcements of new partnerships/collaborative projects, and things like that, so not quite just a random gamble!
Cheers
M,
Perhaps one of the hardest parts of investing is being disciplined. Herd mentality is fuelled by the fear of being left behind and missing a quick buck. Coming up with a strategy is one thing….implementing it successfully is another entirely!
Hi UTMT,
Like yourself I work in a bank, in finance. Up until this year I didn’t have much of an investment strategy, other than getting the maximum eers contribution to my pension.
Although I understood finance and investing, from a theoretical and company perspective, I never really understood investing. At least not from a personal stance, if that makes sense.
After a lot of reading I have slowly started to develop my own strategy, it is a disheartening after a lot of research to come back to some trackers and a suitable asset allocation that suits me. It feels almost too easy…but it seems the most effective method for myself.
I’m also very wary that I’ve not invested through a crash. I like to think that I will carry on with my strategy, and for the most part look at it as a chance to stock up and benefit from the seemingly inevitable bull run that follows. Or perhaps I’d sell everything and buy Greek Government Bonds. Who knows.
Mr Z
Mr Zombie,
I understand what you’re saying. I’m amazed by how many of my colleagues seemingly have no investment strategy, retirement plan and appear to just blast through their substantial disposable income each month without a second through towards savings…despite being very financially savvy in their day jobs!
Interesting post. I only really developed a strategy after reading Tim Hale’s ‘Smarter Investing’ book – before then, I had no real strategy, although I’m only really into my first year of proper investing.
Like Mr Zombie, I’ve yet to experience a crash and I would like to think that I will not press the panic button and sell up when it goes belly up. I actually hope this crash happens sooner rather than later!
Over this past year though, having learnt about passively investing in tracker funds and adapting my strategy towards this, I’m of the view that personally, I find passive investing boring hence I have to include other types of investing too, eg individual shares, investment trusts, peer to peer lending and later this month, debentures.
My overall strategy remains unchanged but perhaps I’ll review in another year’s time.