What can complicate investing, according to Arnold, are certain investment myths, many of which are propagated by insiders in the financial industry.
He is an investor, businessman, author of numerous publications on investment and corporate finance and Professor of Finance (part-time) at the University of Salford. He leads a research team focused on stock market valuation errors.
Arnold says the number one myth in the financial industry is that financial assets and markets are usually complicated and confusing, which they never are.
The second myth, he says, is that investors have to pay large sums to “experts” who then make far greater returns on their money than investors could get on their own.
Arnold says that while some professionals, in some circumstances, have their uses, the idea that private investors are generally at a disadvantage compared to professionals and should always defer to their superior insight is simply wrong.
“As for the argument that you need to employ an ‘expert’ to manage your investments – well, that’s complete nonsense. To begin with, the majority of professional fund managers underperform the market scholarship holder. This has been observed year after year.” he says.
Arnold says the third myth is that only wealthy people can afford stocks and other financial assets, but in reality, people of relatively modest means invest in the stock market.
Essential qualities of a good investor
Arnold says investors need basic knowledge, as well as some dedication to perform their investing tasks. Moreover, investors should focus on their investments and use sound investment tools for superior returns.
Arnold explained some investment principles in his book
The Financial Times Guide to Investing: The Definitive Companion to Investing and Financial Markets that can help young investors achieve superior returns. Let’s look at some of these tips:
Be a business analyst rather than a security analyst
According to Arnold, a stock is not a game meter in a short-term random game of chance, it represents ownership and its value depends on what will happen to that business years from now.
“Investors need to understand the underlying business, not focus on stock price movements. Be a business analyst trying to figure out what makes it work, rather than a stock analyst. Investing in stocks is about companies – when you buy a stock, you’re buying some ownership of a company,” he says.
Do your homework
According to Arnold, not only should investors be prepared to work hard to analyze individual companies, but they should develop a broad social, economic and political awareness.
Control your emotions
Arnold says investors should develop the mental toughness to resist being swept away by the rest of the market when it gets overly excited or too depressed.
“Investors need resilience, self-discipline and courage. There will be long periods where patience will be required, interspersed with the need to act decisively,” he says.
keep it simple
Arnold says the key elements of investment decisions are essentially simple and investors shouldn’t overcomplicate it.
“None of the big investors use the complex constructs of modern portfolio theory such as the financial asset pricing model with its beta analysis. True investment value should scream at you, so detailed and complex calculations don’t are just not necessary to give you the required margin of safety. . All the calculations you need, you learned them before the age of 16,” he says.
Constantly learn from mistakes
Arnold says even these great investors now in their 80s are learning new things every day, often from mistakes.
It could be errors (a) of omission (e.g. Warren Buffett keeps publicly berating himself for missing a big commission opportunity (b) (buying a stock that turns out to be a bad investment) and (c) from others – learning from the mistakes of others.
“You will find that great investors are constantly reading and learning (biography, science, stock history, newspapers as well as company reports) – they never stop expanding their minds,” he says.
Arnold says investors should have the self-confidence that can only come from years of hard work and knowledge.
“They can then stand apart from the crowd and follow their own logic,” he says.
Have a reasonable risk-taking attitude
Arnold says investors should avoid gambling and should make a rational and careful analysis of key risk factors and act when the odds are in their favor.
“Mistakes and misfortunes are inherent in investing – even great investors are wrong more than 40% of the time. They make sure to always be diversified so as not to risk a high proportion of their money on a single outcome,” says -he.
To be independent
Arnold says the market often sets prices that are far from the true value of the business.
“Be independent, evaluate companies and exploit market prices rather than being led by them,” he says,
Invest, don’t speculate!
Arnold says investors should analyze deeply to understand the business, only buy when they are confident of the security of principle, and should aim for a satisfying return, rather than seeking extraordinary returns.
“Trades that do not meet these requirements are speculative. Speculators focus on estimating short-term price movements,” he says.
Do not pay high fees
Arnold says fund managers can get most of the investment gain.
“A 1.5% fee seems low, but can take away a third of your gain. A fund manager charging 1.5% a year better pack real dynamite, while ETFs only charge 0, 3%,” he said.
Diversify, but not to mediocrity
Arnold says investors are vulnerable if they only invest in one stock, so they should diversify.
“Beyond 10, the benefits of further diversification become small. Better to focus your knowledge and sharpen your analytical edge,” he said.
Read the Philosophies of Great Investors
Arnold says investors should learn from great investors and use their hard-earned experience of what works and what doesn’t.
“Enjoy the travel as well as the benefits, because the travel is where you live,” he says.
Arnold says investors should like investing and if they don’t enjoy it, they should hire someone else to do it for them if the fees are reasonable.
(Disclaimer: This article is based on Glen Arnold’s book “The Financial Times Guide to Investing: The Definitive Companion to Investment and the Financial Markets” )