Hugo Young’s 10 Golden Rules of Stock Investing

Blog:

Smart Savers Team | 14 January 2013

It always pays to listen to a successful person in a given field. Hugh Young, one of the star managers at Aberdeen Asset Management, is one such. He has put down 10 golden rules of successful investing. Some of the advice may seem obvious but only a few know how to use it and go on to be extremely successful. The key is to internalise and make it part of your investment approach—a difficult but worthwhile task. Here are his nuggets:

1. Are minority shareholders treated fairly: More often than not, due to poor regulation in India, large shareholders and promoters gain at the expense of minority shareholders. A good company is one that looks after all its shareholders, regardless of stature and size and treats them as equals. The other way of paraphrasing this advice is—look for good corporate governance.

2. A company is as good as its people: Plants, machinery, corporate mission statements, business model, etc, are important. But what is more important are its employees—the heart and soul of a company. Without good people, fixed assets are useless. Check if a company is treating its employees fairly and making them happy.

3. A strong balance sheet is critical: This is probably obvious, but it can be very tricky to decipher it correctly. It isn’t just about assets and liabilities—but a lot more. Analysing the balance sheet can lead you to other sources that can unravel new aspects of a company otherwise not known to you. Pay attention to the details of the balance sheet and compare it with earlier years.

4. Understand what you’re buying: Company managements often talk about elaborate and complicated strategies which catch investors’ eyes. Think of it as makeup—good on the outside to mask the ugliness inside. Good companies reveal their true self—by wearing little or no makeup. It is this inner beauty that counts. Make it a point to seek this.

5. Watch out for ambitious companies: While it is important to have goals and dreams, it is important not to lose focus. Ambitious companies have gone overboard spending large amounts of money, often at the expense of shareholders, to achieve lofty (and unachievable) dreams. Such companies should be treated with caution.

6. Think long term: One of the dangerous aspects of being an investor is succumbing to myopic short-term mindset. Research has shown that wealth can be generated only in the long term. But not many people are willing to wait long. Patience is one of the hardest virtues of successful investing. Develop it.

7. Beware of benchmarks: Benchmarks are indicators of the past and tell us nothing about the future. Besides, you ought to invest according to your own benchmarks—your dreams, goals, needs and so on. Stay away from the crowd and think differently.

8. Take advantage of irrational behaviour: Markets are driven by humans, not robots or complicated trading algorithms. Human beings have the capacity to act irrationally and odd at the most extraordinary times. Take advantage of this reality by staying calm and thinking the opposite—rationally.

9. Do your own research: Mis-selling is rampant in India because most investors do not do their own homework. There is no substitute for first-hand analysis. Remember, the investment profession is not regulated, unlike medicine or accounting; hence, it is trust that matters. Not all companies, reports and brokers can be trusted.

10. Focus on industries with a competitive edge: It is important to invest in companies that will have an edge in the future. A company may be a market leader in, say, typewriters or mopeds, but these industries are past their day; their sales are declining and they have little chance of surviving in the future.

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