I was going to write this as a blog post, but while I'm here I might as well put pen to paper and give you a quick "hot off the press" version.
How to invest for a good nights sleep
Mervyn King recently admitted to not having any sleepless nights throughout the financial crisis.
Now, I'm generally quite laid back, calm, stoic, indifferent, etc.., but I was still surprised that the Governor of the Bank of England hadn't even had one interrupted nights sleep during the crisis; a crisis where, depending on who you ask, we had little more than a day before the world ground to a halt.
But I admire that. It's something I aspire to when I'm selecting companies to buy.
Specifically, I like to think through how I would feel if the UK stock market closed the day after I'd bought the shares, and stayed shut for a whole five years.
Would I be comfortable owning an investment whilst not being able to sell it for five years?
If I can't say that I'd be at least reasonably comfortable doing that, then it probably isn't the sort of company that I want to put in the portfolio (especially as my own pension is about 90% the same as the model portfolio).
Although I look to gain a lot from investing, whether it be financial gain, intellectual gain or social gain, the one thing I don't actively look for is excitement. If anything, good investing should resemble watching paint dry.
It goes like this:
1) Buy good companies with relatively high yields
2) Watch paint dry for several years, at least (or count the incoming dividends which is generally more interesting)
3) Possibly sell the company if the shares become overvalued, or keep holding if it doesn't
Masterful inactivity I've heard it called, and a large part of that is investing in companies that you don't have to fret about or lose sleep over.
On a related subject, here's an article I wrote in the week about debt, which is definitely something to avoid if you want to sleep well:
Mind the Debt - Why FirstGroup's problems were easy to spot Risk is more important than returns. When investors focus primarily on returns they're likely to get sucked into whatever has done well recently and to ignore the central importance of risk management. That is, until a major risk crystalises and whacks them around the back of the head. The June 2013 issue of UK Value Investor is out now. This month I've added an international engineering firm to the UKVI Model Portfolio. Next month is a sell month, so I'll be ejecting an existing holding whose shares have become less undervalued, relative to the other holdings.
The company I have in mind has returned over 100% since it was added to the portfolio just over two years ago. As you can imagine, the shares are less attractively valued today than they were when I first bought them.
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Yours sincerely,
John Kingham
Editor, UK Value Investor | 