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Smart Investor: simple steps to becoming an armchair investor

Instead of wasting time, put together your own disciplined and efficient method of investing based on your strengths.

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by Smart Investor on Dec 03, 2012 at 09:01

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Smart Investor: simple steps to becoming an armchair investor

With the world seemingly moving at a faster pace than ever and people often being cash rich and time poor, finding the time to invest your cash is becoming more and more difficult. Indeed, that is the argument often given for investing in funds, with many private investors happy to hand over responsibility for the management of their wealth to professionals and their advisers.

However, doing so can mean paying higher fees and researching the funds in which you wish to invest. So, whilst it may save on time, it is debatable as to whether it is a logical means of investing all of your wealth. Moreover, having met a considerable number of private investors, I can say with a degree of certainty that taking a much more active role in their investment business is far more achievable than they may recognise.

Low energy

Indeed, in my view it is possible for anyone to become an armchair investor and generate a handsome return (on an absolute and relative basis) without expending a vast amount of time or energy.

To become a successful armchair investor, the first thing you must do is think long term and accept that share prices fluctuate. This will save you a huge amount of time as you will not waste hours reading various bits of newsflow which have little or no impact on whether you buy or sell shares in a particular company.

For instance, I normally invest for a ten-year period. I check the annual report and, if I feel like it, have a read through the odd interim report too. I may check my portfolio every few months but, that aside, I do very little else. I am content for my shares to fluctuate in price because I have no intention of selling them and only really become super-interested in the stock market when it is low or very low. So long as the companies I have invested in are performing well, I have little else to worry about.

Consistency

Successful armchair investors also have a simple, straightforward and consistent investment process. For instance, I am able to tell you within a short space of time whether I think a company is quality. I simply look at things such as return on equity, track record of profitability, debt levels, free cash flow, interest cover, price to earnings ratio and price to book ratio. If a company scores well, I will then consider its economic moat and make a decision.

Indeed, investors who feel they lack time are often the same ones who watch Bloomberg, read the Financial Times and spend their time analysing things which, in reality, are nice to know but which you do not need to know in order to make a decision. Instead of wasting time, put together your own disciplined and efficient method of investing based on your strengths.

For instance if, like me, you can understand accounts, use ratio analysis. If you have a good business brain, analyse sectors. Essentially, find a method which is simple, logical, efficient and with which you feel completely comfortable.

Dull but effective

This process will never be perfect and will inevitably improve over time. However, a simple process which is implemented with discipline and consistency will give you a foundation on which to build.

Sure, it may sound dull, but ask any individual who has made a lot of money in almost any undertaking and they will either tell you it was boring 98% of the time or else they are probably not being entirely straight with you. After all, it is the spending of the profits which is the fun bit.

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11 comments so far. Why not have your say?

I still have a problem with this hands off approach to holding individual shares, rather than funds. What about the out of the blue profits warning, the rights issue or revenue fall. If I did not look at my shareholdings from one half year to the next, I should be terrified at what I might see. Rest easy and if you're not a "hands on" investor, stick to funds!

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John

You are so right.

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This is rather a snippet of an article.

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I check the funds I have invested in every day and I research others and note the ones that are good. There are an awful lot of "dog" funds out there.

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You r right John, I cannot handle shares, thus UT, IT, ETF, ok for me. I have done fine with these longterm, like with any other Investment.

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You could say that Smart Investor is a "top down" analyst. My investment approach is somewhat different. My research always starts from the bottom up. If he has complete faith in historical data fair enough let him go ahead. Personally I'm not into "Blind Man's Bluff"

To me investment is about viable businesses with a rock solid product, and a strong customer base. I like shares which are popular in the market place, and easy to sell, should the need arise.

To meet my criteria: Any company worthy of consideration must have quality management. So whilst Smart Investor is sitting back and waiting for the profits to roll in, which according to him is just a question of waiting ten years, I will be reading the executive directors statements and evaluating their assessments of the health of the business, the state of the marketplace, and the direction in which they intend to steer the company in the future.

After I have assimulated this information, I will be making cross references to other publications to verify how well their statements stack up.

Finally, I take into consideration changes to the current political and fiscal climate which could adversely affect the performance of the shares.

At this point in time the burden fiscal debts,and deficits are weighing heavily on the shoulders of commerce and industry and is likely to suppress growth for some time to come, so whilst I accept that there are companies out there which will thrive and prosper, I am not prepared to wait passively for them to do so.

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"I am able to tell you within a short space of time whether I think a company is quality. I simply look at things such as return on equity, track record of profitability, debt levels, free cash flow, interest cover, price to earnings ratio and price to book ratio." - and once you've made your expert judgement you wait for 10 years? You say you get super-interested when the market is really low - presumably though your stocks won't be really low because of your expert analysis? Or are you waiting for the market to be really low to sell your losers? I can see why you have chosen that picture! Stocks can go down and down and down and waiting 10 years to get out doesn't sound like a good strategy..

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''Successful armchair investors ... For instance, I am able to tell you...''

''To become a successful armchair investor,...For instance I normally....''

''For instance if, like me, you can understand accounts...''

Over-confidence is one of the biggest deadly sins in the investment universe...

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Only pathetic would invest in funds and give away half and more of the returns

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Look at the fluctuations in share prices of an individual company. Each tells a story, but, sadly, not the same story. No, there are shed-loads of reasons why a price can soar or crash. Lamprell screw up their supply chain and the shares go down 75%. Evidence that the ASOS formula will translate well across Europe and the US and the shares go up (10-fold over 3 years). A takeover bid for Sainsburys could double its share price tomorrow. I suspect the Beasts that Smart Investor follows are the Uniliver / BATs/ Glaxo type of company where the steady-Eddy's run the show. If you want to invest wisely, understand what the company does and how it operates within its market. If you lack the interest and the creativity to interpret how and where an enterprise is going, stick to slide rules and ratios but don't preach this as a virtue - it's always second-best.

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Steve P

Dec 09, 2012 at 12:16

There is an even simpler way of investing:

Invest as much as you can with a regular monthly payment into a low-cost tracker fund.

You may not make as much as with a 'hands-on' approach, but the effort is minimal.

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