Investing Principles

Listen to your gut

Any valuation model you may create for a company is only as good as the assumptions about the future that are put into it. If the output of a model does not make sense, then it's worthwhile to double-check your projections and calculations. Use discounted cash flow, DCF, valuation models — or any other valuation model — as guides, not oracles.

Know your friends, and your enemies

What is the short interest in a stock you are interested in? What mutual funds own the company, and what is the record of those fund managers? Does company management have 'skin in the game' via a meaningful ownership stake? Have company insiders been selling or buying? At the margin, these are valuable pieces of collateral evidence for your investment thesis on a company.

Recognise the signs

Whether it is tulip bulbs in 17th century Holland, gold in 1849, or Beanie Babies and Internet stocks in the 1990s, any time a crowd has unanimously agreed that a certain investment is a 'can't lose' opportunity, you are probably best off to avoid that investment. The tide is likely to turn soon. Also, when you see people making investments that they have no business making — think bellboys giving tips on bonds, auto mechanics day-trading stocks in their shops, or successful doctors giving up medicine to "flip" real estate — that's also a sign to search for the exits.

justin.robinson@cavehill.uwi.edu