As I suggested in a previous blog entry, once you have a reasonable sum saved, you might think about using a proportion of it more proactively. To do this, you will need to come up with ideas about what to do with that proportion of your money…
The first “filter” for finding these ideas, might be described as “top down” analysis. This is where you use your knowledge of current affairs, economics and things financial to come up with fundamental themes that, for logical reasons, are likely to be a good place to put your money to work.
We have looked at two such investment themes in earlier blog entries (and in my book): That the world as a whole continues to grow and that inflation is higher than many people realise. Once you start to look at the world with your “investors” hat on, you will, I hope, start to recognise other similar themes. Here are a couple of quick examples:
Example One: Growth in the developing world
We have already established that the world’s population is growing significantly. At the moment, there are about 200,000 people being added per day to the global population. At the same time, the standard of living in many countries in the world is improving such that hundreds of millions of people in countries like India, China, Brazil or Turkey can now aspire to a “middle class” lifestyle in a way their parent’s generation never could.
This reality has given us our “big picture” idea to “own the world” but if we think in more detail about the implications of this reality we should be able to identify more specific investment themes. For example, the fact there are millions of new mouths to feed in the developing world should be very positive for agriculture as a whole. It will also no doubt be positive for the energy sector and for any company involved in construction in these high growth economies. Another correlated theme would be the improvement in water or telecom infrastructure required. In fact, if you stop to think about it, you would most likely be able to brainstorm any number of investment themes which stand to benefit from global growth.
Example Two: An aging demographic in the old world
At the same time that populations are growing and becoming wealthier in most of the developing world, they are doing something rather different in most of the developed world: Specifically much of the population in the developed world is aging. In Japan and Europe in particular, an increasing proportion of the population is approaching and passing retirement age. Again, a moment’s reflection on this reality should yield some logical conclusions about the sort of investments which will benefit: We might conclude that any companies making products for or providing services to the elderly are likely to see the demand for those products and services increase.
As a result, they are likely to enjoy less of an uphill battle to grow their sales and profits than companies in other sectors. You probably don’t need me to tell you that these might include companies in the healthcare space: Companies that make drugs or medical devices such as pharmaceutical and biotech firms or who build or service nursing homes for example.
These are only two themes. I would hope that both of them seem entirely logical to you and, moreover, that you can see how starting to think like this can yield quite obvious places to go looking for superior investment returns. Once you start to think like an investor you will get an intuitive feel for things you believe might give you the best chance of making superior returns on your money.
Your very own theme-driven investment shopping list
Each time you think of something which seems like a good idea, I suggest you write it down and start to build a shopping list of things that you would like to invest in, all other things being equal. This is a great place to start.
Given my own “top down” analysis of what is going on in the world at the moment, my personal top-ten at the time of writing might look something like this:
1) Precious metals and precious metal mining funds / companies.
2) Oil and oil services funds / companies.
3) Healthcare, pharmaceutical and biotechnology funds / companies.
4) Emerging market infrastructure: Water, railways, automotive, agriculture.
5) Potentially explosive frontier markets: Zimbabwe, Mongolia, Burma, others?
6) Rich country funds (bonds and shares): Singapore, Qatar, Norway, Canada, Australia.
7) The world’s best technology companies: Microsoft, Oracle etc. Not Apple (too expensive – see key concept three).
8) The world’s best consumer goods companies: P&G, Unilever etc.
9) The world’s best tobacco and brewing companies (“sin” investing).
10) Clean energy / new energy technologies that don’t require government subsidy. Uranium, thorium, rare earths etc.
To be honest, the list of themes that I am keeping an eye on is substantially longer than this as I am constantly getting excited about all sorts of things but hopefully you can see how helpful it is to start drilling down from the hundreds of thousands of things you might invest in to ones which are likely to enjoy a fair wind for structural reasons.
The “too hard bucket”
For what it is worth, in the process of thinking about investible themes I will often save myself a great deal of time and effort by completely discarding themes which I would describe as being in what I call the “too hard bucket”. There are many areas of investment where I believe the individual investment vehicles are just too complicated to analyse with consistent success.
Two examples of this, as far as I am concerned personally, are financial services companies, particularly big banking groups and any company that relies to a great extent on government contracts, a good example of which would be defence companies.
It is entirely possible to make a great deal of money investing in banks if you are very clever and have a deep knowledge of a large number of complex investment ratios but for the average investor, banks are just too complicated. An important thing to bear in mind about investment generally is that you should limit the number of things you invest in, I would argue to less than about twenty to thirty assets in total. This sort of number gives you the advantages of diversification and the ability to keep on top of them all. If you own much more than this, things become rather too complicated.
Given there are so many things you are able to invest in (if you have your accounts with the right provider), there really is no great loss in deciding to ignore anything that you feel is too complicated. There will always be plenty of other options left for you to succeed with.
For this reason, I am very quick to put any area of investment that I consider too much work to keep on top of in the “too hard bucket”. The downside is that you might miss out on spectacular growth in a sector from time to time but I think this is a small price to pay to avoid the enormous headache of trying to follow a fundamentally complicated and opaque industry sector like banks or defence companies. Never be afraid to put things in the “too hard bucket” and move on to something that is simpler to understand.
Building your list of investible themes is your crucial first step. The next and more important step is to work out the specific investment vehicles (funds, shares etc.) to own within those themes to give you exposure to them. You will also want to do your best to buy those specific vehicles at the right price – i.e. a price which gives you the best chance of investment success in the years ahead.
This is where our third key concept comes in: “Bottom Up Analysis” of which the two main types are fundamental and technical analysis. We will look at the basics of these shortly.
Before we move on, however, let us look at some resources that will help you get a handle on our second key concept as quickly as possible: I recommend the following three action points and resources in order of importance…
Resources you might consider for Key Concept Two:
(1) Subscribe to MoneyWeek magazine and read it as often as possible.
…If you only take only ONE action after reading this book I would recommend subscribing to this magazine and getting into the habit of reading it…
It is my heartfelt belief that if you live in the UK, the single best financial publication you should ensure you subscribe to and read as often as possible is MoneyWeek Magazine. This is most likely the best investment in your financial future you can make. By doing so you will ensure that you enjoy a constant stream of well thought out investment themes as well as specific investment vehicles such as individual funds and shares.
It is a great read, they have a brilliant editorial team and have been producing common sense and making me money for many years. If you do subscribe, you will find the magazine in your letter box every Friday. I tend to spend about twenty minutes every Saturday morning reading it over breakfast. I think you will be surprised at what an easy read it is. It even has sections on wine, cars and property to lighten the tone. I can’t recommend it highly enough. If you would like to take advantage of their standard offer of three free issues then please use the link to the resources section above.
(2) Subscribe to the following free email services:
One of the best things about investment today is how much excellent information you can get entirely free of charge. All you need is an internet connection and an email address. I personally subscribe to dozens of free and paid email services and get as many as thirty such emails a day, many of which I read and all of which I skim. I do not for a minute suggest you do the same. I am obviously extremely interested in the subject. You also don’t need to subscribe to all the services I do because I will highlight the most important things you need to be aware of every now and then in my Plain English Finance email.
These then are the email services I suggest you subscribe to. Remember that it only takes a second to hit delete and you can always unsubscribe from these services if you no longer feel they are providing you with valuable information.
I hope you will forgive the self-promotion but obviously I truly believe you should subscribe to my free email service. Unlike many of the other free services I suggest below, I will only send an update from time to time to remind you of all the excellent steps you can take to get your finances humming and to highlight anything I think is particularly interesting or important for you to be aware of. This is categorically not a daily email as I will only send you information when I think it is very important. It is perhaps worth noting that Plain English Finance is fully regulated and authorised by the Financial Services Authority in the UK.
This is MoneyWeek Magazine’s free daily email and I think it is superb. Click here to go to their sign up page…
(3) Stansberry & Associates
This is a first-class US-based investment newsletter service. If you want to receive their research products you can pay hundreds or even thousands of pounds to do so but, fantastically, you can get very useful information from their free email services. Three of their best are: The S&A Digest, The Growth Stock Wire and Daily Wealth.
You can subscribe to them all by emailing: firstname.lastname@example.org .
There are dozens of other excellent free email services, but I feel these three are a very good starting point and will provide you with plenty of extremely useful information entirely free of charge.
Professor Ferguson was named one of the one hundred most influential people in the world by Time Magazine recently. This book is a superb summary of the history of money. It takes you all the way from ancient history to the financial crisis of the last few years. It is of practical importance for your development as an investor that you have a basic grasp of the history of money and the various financial products. This is the best book for this purpose that I have read to date. There is also an accompanying television series which you can buy on DVD (link above) which might be a more fun way of acquiring the relevant knowledge if you are not a big reader.
Let’s now move on to our next Key Concept: “Bottom Up” analysis and understanding fundamental and technical analysis:
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