How to Invest in a Great Stock?
In this post, we are going to discuss how to invest if you found a great stock. In my previous post, we discussed how we should be cautious when we think that we have found a great stock.
Should you find one, Congratulations! However, that is not the end of the journey. The next step is how should you invest in it?
I am not referring to which brokerage to use or whether to use options strategies. But if you are getting started, you can start by reading this series of post.
I am referring to how much to invest in that stock?
How Much To Invest?
In theory, if you believe it is a great stock, you should LOAD UP THE TRUCK! Yes! That is how many of the great investors made their riches.
To get rich, be concentrated.
Warren Buffett’s portfolio was so concentrated in the past that American Express was once over 40% of his portfolio, and that made him his first pot of gold. This story was such a classic, and many people followed Warren Buffett.
While emulating success is a proven method to success, we must understand what are the underlying reasons for Warren Buffett being so concentrated.
What Are Warren Buffett’s Reasons for Being So Concentrated?
- The Investment was Special. Back in the days, Amercian Express was NOT the great company you see today. Buffett bought it because American Express under a scandal attack and the share price dropped over 40%.
- He Understood the Company Deeply. Buffett had done a lot of research in the company and bought so many shares that he was put on the Board of Directors in American Express! With that kind of influence, he helped American Express navigate through the scandal and recover from attack.
Can We Follow Warren Buffett?
To answer this question, you need to ask more questions.
- Is this investment opportunity special like that or American Express?
- Does it happen once in many years and if I do not LOAD UP THE TRUCK now, I will miss the opportunity forever?
- OR is it a great company which I can invest in it later on?
- Do you understand the company enough? Buffett reads hundreds of reports monthly before he takes action to invest.
- Is your research enough to understand the company thoroughly?
- Can you influence the company like how Buffett did, as a director?
I believe for most people, their answers would be No.
Then in that case, you should not be too concentrated in your investment because you MIGHT be wrong about the company. And if you are too concentrated, when the company does not do well, it will be your demise as an investor.
Buffett Protects His Money Too
While Buffett is a strong proponent for concentrated portfolio, he also speaks about protecting your capital. His famous quote is
Rule No. 1 : Don’t lose money
Rule No. 2: Refer to Rule No. 1
Warren Buffett
Why are his opinions so polarising here? Actually they aren’t.
To Buffett, even when he is concentrated, he believes that he will not lose money because he does so much research into the company. The more research he does, the more he understands the company. The more he understands, the lesser the chances of him losing money. (Of course there are instances where he is wrong, he is human after all)
For the other investor, unless you have the same level of understanding in a company like Buffett, you have no business being so concentrated because the chances of you being wrong about the investment is much higher than Buffett.
Stay in the Game
Protecting your capital is the most important thing to do as an investor, profits are secondary. It is like your health bar in a game, so long you are alive, you can continue to play the game of investment. You can live to make profits another day if you missed it this time.
But if you lose your capital due to overly a concentrated portfolio, your health bar runs out. You will not have any more money to invest. You will need to save and scrimp again to accumulate your next investment capital.
Protection is more important than profits.
Anyway, one last quote for the day.
If you take care of the downside, the upside will take care of itself.
So How to Invest?
In the next post, we will discuss how you should invest to protect your capital while making the most profits possible.
