I have been investing in stocks since I was 19 years old. I am not the next Warren Buffet when it comes to stock returns, but over the span of 15 years I have learned a few things on mutual fund/index ETF/stock selections. Here are a few random thoughts I have on index ETF & stock selections.
1. Past performance does not guarantee future returns
When I used to buy mutual funds, I would always look at past performance to determine whether to purchase the fund or not. In reality, past performance has zero influence on whether the fund will continue to perform in the future. This is true for index ETFs and stocks too. Take Apple for example. Apple has done extremely well since the release of the iPhone. If you look at past performance only, you would believe that the future is looking extremely bright for Apple. But is this the case? Probably not. What happens if an “iPhone killer” gets announced tomorrow and 99% iPhone users switch to this said iPhone killer? What happens if growth dries up because Apple is no longer producing innovative products?
When selecting a mutual fund, an index ETF, or a stock, don’t base your decision on past performance. Past performance gives you an indication on how well the mutual fund/index ETF/stock did in the past. Whether the performance continues or not is dependent on future executions. Look at future profit growth potentials and if the company can continue be a leader in its sector.
2. There is no such thing as the best performing index ETF
Index ETFs are designed to track a specific index performance minus management fees. Index ETFs are not supposed to out perform the market. There are lots of index ETFs tracking different indexes. For example the S&P500, the TSX Composite Index, the Russel 3000, and etc.
If you look at S&P500 index ETFs, their performances should all be very similar. Why? Because they track the same index. A Vanguard S&P500 index ETF should have similar performance to an iShare S&P500 index ETF. If they don’t have similar performance, warning lights should come on in your head.
So how do you pick one index ETF over the other? Easy, pick an index ETF with the lowest fee.
3. Buying value will out perform hype
Buying a hyped stock may give you a decent return in the short run. But over the long run, buying value will usually provide a greater return.
I have learned ways to analyze technical charts and doing momentum investing. These techniques work and do not work. It really depends on the stock. When the techniques work, boy it is one hell of a ride. When they don’t, you start second guessing yourself. When it comes to momentum investing, it is all about the short-term and catching the wave. You can make big bucks but you can also lose big.
It is simply less complicated and less stressful to invest in a value stock with a large moat. Trust the management to grow profits over time and increasing values for the shareholders.
4. Go with your instinct
When I first came across Google back in the 1990’s, I thought the search engine was revolutionary. It was million times better than the likes of Yahoo, Excite, and AltaVista (do people use these search engines anymore?). I was convinced that Google would do great things and told my dad that Google stock would be a great buy when Google decided to go public.
When Google went public, I didn’t follow through with my conviction. I didn’t purchase Google much much later and lost out on multi-bagger returns.
Similarly, when Apple announced iPod I was very convinced it was a revolutionary product. Having used other MP3 players before, iPod was a million times better. Furthermore the music platform, iTune was also a game changer. I remembered my university friends showing me other people’s iTune libraries and play their music when you were on the same wifi network. I also recall feeling extremely envy of friends having iPod nano. Later when iPhone was announced, I thought this was yet another game changer. When a co-worker showed me his iPhone 2G, I was stunned how much better it was compared to other smart phones in the market. In the back of my mind I thought Apple stock would be a great buy.
Unfortunately for me, I didn’t purchase Apple stock until much later. Once again I didn’t go with my instinct and lost on multi-bagger gains.
When it comes to investing, it is a lot simpler than many people thought. Investing in stocks is not the same as gambling in a casino if you do your homework beforehand. Learn to read financial results like the quarterly reports and annual report. Most importantly, understand the macro environment to evaluate the future profitability of the company.