Many of you would have heard the names of successful investors in the media.
Warren Buffett is probably the most famous of the crop of successful investor, having built an empire in his Berkshire Hathaway (NYSE: BRK.B) investment vehicle.
There are others, too.
Benjamin Graham was known as the “father of value investing” and wrote the seminal book “The Intelligent Investor” back in 1949 which is still in print today!
Peter Lynch is another well-known name.
During his tenure as the fund manager for Fidelity Magellan Fund from 1977 to 1990, he delivered a stunning annual return of 29%.
So, what valuable lessons can we learn from these investment greats?
Here are four that you can apply to your investment journey.
1. Think long term
As the saying goes – in the short term, the market is a voting machine, but in the long term, it is a weighing machine.
Great businesses need time to grow their revenues, profits, and dividends.
Business strategies need to be mooted and executed and new products and services launched.
Suffice to say, great businesses do not just pop up in a short time, but require many years of growth and nurturing to be where they are today.
Take consumer goods giant Kimberly-Clark (NYSE: KMB).
The company was founded way back in 1872, has a market capitalisation of US$43.7 billion, and now boasts more than 44,000 employees.
It sells a variety of well-known brands such as Huggies, Kotex, and Cottonelle to people in more than 175 countries.
Apple (NASDAQ: AAPL) is no stranger to most investors, too.
The iPhone and software company was founded in 1976 and has now grown to become the most valuable company in the world with a market capitalisation of US$3.8 trillion.
These are just two examples of businesses with humble beginnings that grew to become behemoths.
Their share prices have also grown exponentially since their founding and made early investors very rich.
2. Harness the power of compounding
Successful investors understand and can harness the power of compounding to enrich themselves.
Compounding is a process where you reinvest your dividends and capital gains back into the same stocks, thus helping your money to make more money.
There is an easy way to do so with dividend-paying stocks such as Frasers Centrepoint Trust (SGX: J69U) or DBS Group (SGX: D05).
When these companies pay out dividends, you can take a portion of these dividends and reinvest them in the same stocks that paid them out.
By doing so regularly, you can build up a larger portfolio over time and also increase your passive income stream.
3. Learn from your mistakes
The best investors in the world are still human after all.
And humans make mistakes.
The key is to ensure you learn from these mistakes by documenting them in a learning journal.
By reviewing your past mistakes and absorbing the lessons from them, you can slowly evolve to become a better investor over time.
For example, you may make a mistake in selecting a company with too much debt that does not generate free cash flow.
Once you learn from this lesson, you will be more careful in selecting such companies in the future.
As you go about documenting your mistakes, treat them as a journal that shows you how much you have improved as an investor.
This simple act should also help to increase your confidence and push you to continue learning from not just your mistakes, but also the mistakes of other investors.
4. Willingness to tolerate volatility
Volatility is part and parcel of investing in the stock market.
Share prices can be affected by all manner of events and also by investor sentiment.
The announcement of earnings, a profit warning, or an acquisition can cause shares to either shoot higher or to plunge.
These share price fluctuations are a normal part of a well-functioning stock market and should not come as a surprise.
The best investors in the world know that they need to tolerate this volatility to achieve superior long-term results.
You should treat this volatility as a price you need to pay to obtain a total return that can comfortably beat inflation.
It all boils down to emotional control.
Learn to focus on what’s important – the business fundamentals, and to ignore all other “noise” that cause the share price to gyrate constantly.
When your focus shifts to how the business is performing and its prospects, you are in a better position to ignore the share price movements.
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Disclosure: Royston Yang owns shares of DBS Group and Apple.
