Luck in Investing

Chasing the Dream

People love to dream, they dream of the big pay-off, winning the lottery, a forgotten uncle leaving them a fortune in their will, finding gold or making a fortune on a speculative share.

Why else do we spend so much on lottery tickets when the odds are against us? Only around 60% of lottery ticket sales are redistributed in winnings and this is before you even count the odds of having the winning ticket. This is not the basis for a sound decision.

With share investment, or more correctly speculation, people love to do the same. They are attracted to the stocks with a potential big pay-off, the ‘lottery stocks’.

People are attracted to stories of winners and dream of being able to do the same.

There are lots of share market stories of seemingly ‘lottery stocks’ such as buying Altium (an Australian company which supplies software to help design printed circuit boards) for 15 cents in 2012 which is now worth $15 a share. Another example is Queensland Gas Company with shares priced at 20 cents in 2003 and then going up strongly on the gas boom until the company was bought out in 2008 at a price of $5.75.  These stories attract people to the share market. But they are rare and chasing these winners is like buying lottery tickets, it is really the luck of the draw if they pay-off.

 I work hard to take as much luck as possible out of investing. 

An easy way to attract clients to invest through me would be to talk about the shares that have made big gains I have recommended, but that would give a false impression of the arcinvest investment philosophy.

Clients don’t want to hear about the solid manufacturing company that has made an average 14% pa return for investors over the last 5 years.  Yet, a diversified portfolio of these dull boring stocks in your investment portfolio will serve you very well over time.

 “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” George Soros

When I select investments, they may turn into 10 baggers (go up 10 times your initial investment) but I do not spend my time searching for investments thinking “is this a 10 bagger?”

I look for investments with:

  • a reliable growing earnings stream
  • low debt
  • capital allocation decisions that benefit you, the shareholder, increasing the value of your equity.
  • good management
  • a durable competitive advantage
  • a share price below my valuation of the business

Making a number of investments satisfying the above will in the long term ensure you good overall returns, limit your downside and who knows one of them just may end up being a 10 bagger.

Posted in Active investing, Behaviour, Investing.