Successful investment gurus are made not born

In many coffee shops in the Gulf, discussion soon turns to how friends, lowly or otherwise, made millions in their investments, and to bragging about one’s own imaginary prowess in this field. The truth is often less glamorous with more stories of woes than riches.

While there are very few globally recognized successful investors such as Warren Buffet, there are many smaller successful individual investors. What are the common factors that these smaller investors have in common and the secrets of their success?

They might not be making 30 or 40 percent plus- returns every year, but they have been consistently successful and it is apparent that they share some common factors.

Amongst these are some well-founded investment principles which our coffee shop loving friends should bear in mind. The first is simple – not accepting announced company financial figures without questioning but is the most difficult as it involves some hard research.

Analysis of released company financial and other management information is a good place to start, as well as more research on the company from public sources, and this is why lazy but financially literate individual investors pay high fees to professional investment managers to do.

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A good researcher will be able to examine further items on the income statement (profitability statement) where investors should be aware of remarks noting “exceptional earnings” items such as in selling land that has not gained from operational activities of the listed company. Too many Gulf statements and reports are nothing but glossy PR documents and still lack fuller transparency.

A second approach is technical by buying low debt-to-equity stocks. While some investors have their own target ratio, most of these successful investors seem to stick to companies with a debt-to-equity ratio of below 50 percent.

These investors felt uncomfortable with companies with a high debt ratio on a company’s balance sheet. They believe that during times of financial crisis and tough bank lending policies, companies with high debt were the ones most likely to be in trouble in their expansion plans or in meeting their debt obligations. Those in the Gulf with Islamic finance preference, also feel more comfortable with such type of companies.

While not every successful investor will be the same, yet there are common characteristics that successful investors share which could be easily adopted by any investor seeking long term returns

Dr. Mohamed Ramady

Key assets

Another tip is to concentrate portfolios in key assets. While portfolio asset management best practice is to have a more diversified portfolio, yet some of the successful investors chose to have concentrated portfolios based on a smaller number of stocks. This was only successful as it was based on some very detailed company research, and not on “tips” and guess-work.

Another is avoiding a dividend trap. Paying out large dividend returns might be something that all investors look forward to receiving, but sometimes paying out large dividends might not necessarily be a good sign. The company could be setting a “dividend trap” to ensure their stock is in high demand, when careful analysis of their income statement and balance sheet reveals that this high dividend payment is not sustainable.

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Again, in the Gulf, some investors seem fixated on this short-term goal. Another well-established strategy and seemingly obvious is seeking out promising companies that are undervalued because of temporary operational problems.

These successful investors did not follow the “herd mentality” and looked for investment opportunities that were either over priced because of irrational buying (they sold out), or were sharply sold due to irrational selling (they bought).

Sometimes a temporary “negative” news about a company’s operations or a slowdown in its expected commercialization of a particular patent or investment plans gave some of these successful investors the opportunity to buy the company stock based on their long-term expectations of a turnaround in the negative news. This though requires nerves of steel and avoiding self-doubt.

Too ‘greedy’

While some investors wait until their stocks have risen ten-fold before selling, others are content to sell after a few points have been gained. The key point here is that one should not get too “greedy” but take profits which are in line with achievable goals and targets.

Setting achievable goals only comes about if there is a strategy in place which has clear asset-allocation and risk/reward portfolio parameters in place. Setting achievable goals also includes being disciplined savers, as savings will facilitate investment opportunities.

The story of Warren Buffet and how he made his millions is an inspiration of a success story for all investors. Known as the “Oracle of Omaha” for his remarkable investment skills, Buffet has made a huge fortune but is also is a significant philanthropist giving billions to charity.

What is the basis of his success? In summary, Buffet’s investment philosophy was one based on the principle of buying stocks in well-managed and primarily under-valued companies. He was a long-term investor and not a short-term speculator which alas seems to be the majority of those individuals investing in the regional stock markets.

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He refused to be swayed by new investment “gimmicks” and did not enter the “” investment bubble and sat out the incredible run-up in technology stocks during the late 1990’s and is today wary of the Bitcoin craze.

He focused on basic industries serving the long term needs of the community such as health, food, telecommunication and transport. Buffet saved consistently and still remains frugal and low key in his personal expenditure.

In conclusion, while not every successful investor will be the same, yet there are common characteristics that successful investors share which could be easily adopted by any investor seeking long term returns.

Next time one meets with coffee shop investment guru friends, just remember some of the basics of successful investments and sit back and enjoy the coffee.

Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post Shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.

Last Update: Wednesday, 20 May 2020 KSA 09:52 - GMT 06:52
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.