If you want to increase your investment returns, it can be helpful to study how investment professionals manage their money. Not only can you see their investments in publicly available records, but you can also understand how they approach investing as a discipline – their attitudes, philosophy, setbacks and the wisdom they’ve learned over years or even decades of ‘managing money’ .
Below are nine ways from the pros you can use to boost your investing game.
How to invest like an expert
If you want to invest like an expert, the first step is to research their approach. Here are nine things investment experts are doing to improve their returns.
1. Think long term
Investors rarely think about what a stock might trade for next week, unlike traders, who look to make profits on relatively short-term trades. Investors spend years or even decades looking for companies that are well positioned to make their money. Short-term stock performance is virtually irrelevant as long as business fundamentals remain on track.
Thinking long term has a number of important benefits, including forcing you to think like an owner, reducing capital gains taxes and improving your overall returns. Imagine if you invested in huge long-term winners like Apple and made a 50 percent gain after holding for a while. You would have missed out on huge profits over time, while you could have deferred taxes on your profits.
To quote the late investing legend Charlie Munger: “The first rule of compounding: never interrupt it unnecessarily.”
2. “Don’t lose money”
“Don’t lose money” is the maxim that super investor Warren Buffett cites as his number one investing rule. (His second piece of advice: “Don’t forget rule No. 1.”)
Of course, no one approaches investing to lose money, but if you don’t take the right approach, you can easily lose your shirt. But the advice to ‘don’t lose money’ means focusing first on what you might lose: the potential downside of an investment. If that downside is low enough, it may be worth investing if the potential upside is high enough and likely to materialize.
So if you eliminate the biggest potential losers, you’re left with more likely winners. While your investment won’t be all winners, you’re not likely to lose that much in total, leaving you with more money over time and better total returns in the long term.
3. See what other investors find interesting
You don’t win points for originality in investing – the name of the game is making money. Here you can be rewarded by cheating your neighbors and you should take a look.
It may be worth tracking what the big investors, including Warren Buffett through Berkshire Hathaway, are buying through Form 13F, which the SEC requires for mutual funds with more than $100 million in assets. So you can easily find what the professionals are buying, even if you’re not sure why they’re buying it. So to find out why a professional buys something, you can find an explanation in the quarterly letters that hedge funds and others send to their retail investors.
Of course, it’s not enough to buy a stock because the professionals like it, although it is a starting point.
4. Build an investing community
Major investor filings can be a great place to find large-cap stocks, but you may be able to find even more attractive smaller stocks that the big boys can’t touch. And that’s where it can be helpful to have an investing community that you can click on for stock ideas and share your own.
With an investment community, you can share your ideas with other investors and see what they think and where you may have missed a crucial detail. A community is also great for going through a bunch of stock ideas faster than having to go through all the details yourself. You can search the market more quickly and see what others think are the most compelling ideas out there.
5. Look at underperforming sectors, stocks or asset classes
One of the best sources of investment ideas for expert value investors is discovering what’s out of favor today, whether that’s a stock, a sector or an asset class. If it is likely that this undervaluation will correct itself at some point in the future, it may be worth further investigation.
For example, experts can look for stocks that hit 52-week lows or remain at their lows for some time, and then assess whether their problems are temporary or not. If a company can overcome its problems, it can return to investor favor and generate above-average returns.
For asset classes, investors can look for undervaluation compared to other asset classes. For example, in 2023, the Magnificent 7, made up of large technology stocks, led the stock market higher, while small-cap stocks fell by the wayside. But by year’s end, large caps were valued at multi-year highs compared to small caps, making small caps a relative bargain. That’s why investors rushed into small-cap stocks, pulling the best small-cap ETFs out of the nosedive.
6. Do your own research
It can’t be said enough – with all these ideas you get from others, it’s crucial that you do your research. You can’t trust what an anonymous (or even non-anonymous) individual on the Internet says about a company – one of the reasons penny stocks are dangerous – and you should verify the facts and come to your own conclusion about whether it share opportunities.
So getting ideas from others is great, but do your own research before putting your money to work. Doing your own work can also give you the confidence to buy more later, especially if stock drops. If you know the company well, a lower price may be a good time to load up.
Here’s how to research stocks like the pros, including techniques to find crucial information that most investors miss.
7. Have your buying list ready to go
Top investors are always learning about good companies that they would like to own at the right price. Even if they think the stock price is too high right now, it could be a company they want to own later if the price falls. The pros have a watchlist of stocks and the price they’re willing to pay for them, so if the market drops, they’re ready to make good deals.
Having a shopping list means you can act quickly if the market overreacts to short-term news or even if a bear market emerges and you need to sort through your top choices. You don’t have to think when emotions are running high and you can take action based on the work you’ve already done.
8. Focus on your best ideas
The best investors tend to concentrate their money in their top ideas and prefer them to, say, their twentieth best idea, which may not deliver as much risk-adjusted return as their best. By focusing on their best ideas, the experts can achieve high returns with a certain amount of capital.
Pros can take concentrated positions because they think long term (Rule #1), focus on the cons first (Rule #2), and have confidence in their own research (Rule #5). In other words, because they do the right work, they can take the risk of a concentrated portfolio.
Finally, don’t fall into the foolish trap of building a concentrated portfolio in the belief that this will make you an expert. That’s an easy way for overconfident people to blow up. For most investors, it is advisable to use diversification to reduce their risk. For example, buying an S&P 500 index fund can give anyone a more secure portfolio without having to do the research work of owning individual stocks.
9. Invest in a trend with ETFs
It can take a lot of work to know enough about a sector to invest in it, but investors looking to capitalize on a major trend can buy a sector ETF and benefit from its growth.
For example, understanding the semiconductor industry can be difficult, but the sector has been delivering excellent returns for years. By buying a semiconductor ETF, you don’t have to do all the deep work of investing in individual companies and you don’t have to pick winners. Instead, the overall growth of the sector can boost the portfolio.
However, it is important to understand what an ETF owns and whether it actually owns stocks that will participate in the trend the fund claims to represent. For example, a blockchain ETF could own companies where only a small portion of revenue comes from blockchain-related ventures, while the rest comes from software, finance, or other industries.
In short
Following the best practices and behaviors of experts can increase your investment returns, although it is essential to understand that you must put them into practice over time. And as you get better, you’ll discover techniques and tricks that best suit you and your temperament.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
