How to Invest Profitably (For Most People)?

This topic is definitely a controversial one, because there are many different ways to invest, and frankly I have seen successful cases in many ways.

Therefore, the keyword here is “Most People”. If you think you are NOT most people, then you don’t have to read on because I believe you already found your profitable way of investing.

Let me start with a story.

In 1950s, a portfolio manager named Robert Kirby received horrific news. The husband of a long-time client over 20 years just passed away. Kirby was particularly familiar with the couple because the husband, while not a client of Kirby, was in charge of all the family financial affairs. Hence, he was Kirby’s primary contact.

Of course, when the husband passed away, the wife inherited his estate so Kirby was asked to do the transfer and manage it together.

When Kirby looked into the husband’s stock holdings, he was amused. He realised that the husband has been piggybacking Kirby’s investment recommendations to the wife. The husband would simply invest $5,000 in each buy recommendations. But Kirby realised that the husband only followed the buy recommendations and ignored the sell recommendations. He would just tossed the share certificate into a deposit box and forget about it. (Yes, back in 1950s you get a share certificate when you buy a stock)

Of course, the husband’s portfolio looked weird with some investments smaller than $2,000 but he also had several investments over $100,000. Most importantly, he had one huge investment that eclipsed the wife’s total portfolio. A $5,000 investment in a small printing company which became over $800,000 in value.

The company was Xerox.

This story was later published in the Journal of Portfolio Management in 1984. You can find it here.

What is the Moral of the Story?

For most people, the best strategy for most people is the good old “Buy and Hold”

However, you should ask a few questions before you decide if the investment is suitable for buy and hold.

Question 1: Are you willing to bet that this company will do better in the future, say 10-20 years?

If the answer is “Yes”, then proceed to question 2.

Question 2: Can you stay invested in this company for the next 10-20 years without withdrawing out the money?

If the answer is “Yes”, then the investment is suitable for buy and hold.

What about the Price?

In normal circumstances, I would say price is important. But if you found a great company that you are confident it will do better in 10-20 years, and you are able to hold on to the investment, my opinion is that price does not matter anymore.

The simplest way to explain this is to take a look at Amazon. Inc.

Back in 2017, when Amazon was nearing $1000 per share at an all time high, many people thought I was crazy to invest at that price. Valuations were sky high and eCommerce business in America seemed to be slowing down.

But I applied the two simple questions.

Are you willing to bet that this company will do better in the future, say 10-20 years?

My answer was an unequivocal YES.

Can you stay invested in this company for the next 10-20 years without withdrawing out the money?

My answer was a Yes too, because I invest with money that I can afford to lose. That also means I can stay invested for a long long time to come.

Today, Amazon is reaching $2000 per share.

Really So Simple?

Of course, using one analogy is not good enough to be scientific proof but you get the idea.

The price of a great company will tend to go higher due to their increasing profits and inflation.

So even if you invested at an all time high, so long you can hold onto it long enough, the chances are you will be the one laughing at the end.

Now the question is how to find great companies?