I want to share a powerful idea with you.
It’s something I’ve talked about before. But it’s an idea that often needs reinforcing.
Understanding this idea will give you an advantage over almost all other investors. You’ll even have an advantage over professional money managers, most of whom fail to practice this powerful idea.
But before I explain the idea, let’s look at a segment Livewire calls ‘Buy, Hold, Sell’.
In this segment, The Australian Financial Review (AFR) brings in two fund managers (fundies). They pitch three well-known stocks investors can buy right now. And like the name suggests, the fundies give a short explanation of why they would buy, hold or sell that stock.
In July this year, it was Cochlear, Flight Centre and Blackmores in the spotlight.
Surely you want to know which of these stocks fundies were buying…
Invest for the long-term
Below are the decisions from the two fundies:
|Fund 1||Fund 2|
Both fundies agreed that Cochlear was simply too expensive (then trading at 40-times earnings). The same was true with Flight Centre.
When it came to Blackmores however, Fund 1 was concerned about earnings volatility, while Fund 2 believed in their China growth story.
OK, so why am I bringing this up?
Well, like all ‘Buy, Hold, Sell’ segments, managers are very often focused on near term earnings. You’ll hear them talk about next quarter or what they think earnings will be next year.
And that’s completely fine, it’s the game they’re in. They’re not necessarily trying to find the next Cochlear or Blackmores.
These funds, and most others, are far more concerned with short-term performance. If returns are great (better than the market) in the next 12-months, they’ll have an easier job of drawing more capital to their fund.
If performance dips, considerably lower than the market, investors might jump out and move somewhere else.
Even if these managers found a stock that could potentially rise 1,000% or more in the next five years but won’t do much over the next 12-months, they’ll likely stay away.
It’s very easy to see why so many fund managers underperform their benchmark. They’re in the game of guessing what’s around the corner.
The problem for individual investors is they try to copy this strategy. They’re constantly looking at stock prices. They want to trade in and out of stocks, trying to gain a few percentage points.
It’s a terrible way to invest if you have the option to take the long-term view.
As you might have guessed this is the powerful idea I want to share. It’s your secret weapon to beat the fundies, the market, and generate a fortune over time.
And with such an approach you have a better chance of picking up the next Amazon, REA Group or Google. These are the kind of stocks every investor dreams of buying.
These wonderful businesses don’t always follow a linear trajectory however. On their way to the top they stumble and sometimes fall.
But these businesses have so many factors working in their favour. With time and the compounding effect, these kinds of wonderful businesses can turn $10,000 into hundreds of thousands, sometimes millions of dollars.
Of course, if you sell out early because you think they’ll miss their quarterly estimates, say goodbye to the biggest gains you could potentially ever see.
Not information (because everyone has it), but time is your ultimate weapon.
How can you use this weapon today to generate massive returns?
Let’s take a quick trip to China.
Should you follow fund managers advice?
Do you know what WeChat is?
Many call it the WhatsApp of China. Yet that hardly does it justice. South China Moring Post explains:
‘WeChat, or Weixin as it’s known in China, began life in a southern corner of the country at the Tencent Guangzhou Research and Project centre in October 2010. Since then, it has grown into the most popular mobile app in the country with over 1 billion monthly active users who chat, play games, shop, read news, pay for meals and post their thoughts and pictures. Today, you can even book a doctor’s appointment or arrange a time slot to file for a divorce at the civil affairs authority.
‘The seven-year-old app has also laid the foundations for stellar growth at Shenzhen-based Tencent Holdings, the tech giant behind WeChat, turning it into one of the most influential companies in China and grabbing the attention of global investors. Since the official launch of WeChat in January 2011, Tencent’s market capitalisation has risen over tenfold.’
You’re likely aware investors have recently turned sour on Tencent. Chinese authorities are cracking down on youth gaming addiction and it’s affecting a large part of Tencent’s business — online gaming.
Their most recent quarterly results were among their worst ever. And I’ll bet many fundies are expecting another bad quarter to come, which is why so many have sold the stock.
But you would have to be crazy to write this company off. Sure it’s expensive, even though it’s dropped almost 25% this year.
Yet the economics of the business are simply amazing. While Tencent’s growth has come from online games, their future growth might come from advertising and the monetisation of WeChat.
I’ll bet if you ask any fund manager selling the stock, most will tell you Tencent could easily trade higher in five years’ time.
So why not put on your long-term hat and run the ruler over this incredible tech conglomerate?
Editor, Money Morning
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