Finance 7. Peter Lynch: quality counts “Go for a business that any idiot can run − because, sooner or later, any idiot is probably going to run it.” This rather colourful quotation from Peter Lynch is an important reminder that some businesses (and, by extension, some investments) are better than others, enjoying inherent structural advantages that will put them ahead of their competition for long periods of time. Part of Lynch’s investment secret was to identify such quality, “idiot-proof ” businesses and load up on them, while ignoring commodity-driven businesses that have no inherent competitive advantage. Most snowbirds would be well-served by following Lynch’s lead. When it comes to building your stock portfolio, focus on quality: businesses with sound structures and lasting competitive advantages that help defend them fromwhat Lynch might call the “human factor” − poor decisions made by poor management that result in poor execution and poor stock performance. While no business is ever “risk free” or immune from danger, focusing on the “best of the best” businesses can help position your portfolio for steady, long-term growth, while inoculating it somewhat from volatility. 8. Paul Samuelson: never confuse investing and speculation “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Samuelson was a Nobel Prize-winning economist and a very early investor in Warren Buffett’s Berkshire Hathaway Corporation − an investment that ended up making him very, very rich. His wisdom reflects a fundamental truth that he, Buffett andmany other successful investors followed throughout their lives: stock investing should be rational, logical and as boring as possible. Sure, making money is exciting. But taking irrational risks or wild financial bets in pursuit of that excitement − what we typically call “gambling” − should have no part in it. It’s an important lesson to keep in mind as we enter what may be a different phase of the current bull market. Over the past several years, it’s been easy to take a few gambles on ideas that seemed far-fetched, or businesses that had interesting ideas but little to show in the way of profit − maybe you had a couple of such gambles work out for you. That’s great. But don’t ever confuse what you’re doing with the careful, reasoned process of analyzing a business andmaking a careful assessment of risk and reward. Just to be clear, there’s nothing inherently wrong with speculating − a lot of people make a lot of money in a very short period of time by buying or selling a “hot stock” at the right time. But, if you do it, make sure that you know what you’re getting into, keep your speculation percentage as a manageable portion of your overall portfolio (5-10% of the total seems a good general rule) and be ready to cut your losses quickly if the market takes a turn for the worse. CSANews | WINTER 2021 | 29
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