Happy Monday! Long time no speak. it’s been a few months since my last post and I apologise for that, I do not want to write for the sake of writing and updating, I prefer to write in order to provide information and insight.
If you follow me on Instagram you would have seen me post this picture
I was strolling through duty-free at the airport with an hour or so to kill before my flight and wanting some brain food I decided to head to WHSmith and search for a few books to take with me. One of the books that I bought was ‘How to Run a drugs cartel’ – A unusual book to say the least; very gripping and a real insight into how to successfully run a business. Although this is an ambitious link; how the drugs cartels are ran, shouldn’t be too far away from how a successful portfolio develops and is born. An ambitious and divergent thought process but there is meat on the bones. Hear me out.
The first thing i realised whilst reading this, is that a cartel stats small and focus on running one area very well before they diversify. That is a great approach when looking at market sectors in your stock investments. Why ‘shoot from the hip’ and spray across the FTSE 250 trying to find one stock to add to your portfolio, or to invest in. The biggest gains I have made is when I have done my research on a certain sector and know it extremely well. In the first scenario I chose the large consumer beverage sector, I had my eye on Coca-Cola and instead after a period of analysis into the sector of the drinks market, I went for Starbucks- quite the opposite of my original plan however here are some of the reasons for the switch
- Really high cash flow enabled them to grow organically at and break into new markets
- Great vision of growth in Asia and Far east – very untapped market
- Strong Balance Sheet
- Brand Reputation and the demise of other coffee retailers Coffietopia
- addictive and cult=like consumer followers –
Over the period of a year the stock price rose from $41 dollars a share (Jan 2015)) and I sold just shy of $60 dollars later in the year. With commission and FX fluctuations, I had made around 35% in that move. This is one example of knowing your sector in detail. One important thought I have when I have found a company I really like is:
“On paper a company may look undervalued, but how does it look vs. it’s competitors in the market’
A company may be making a contribution of 20% and a profit in the millions, it has a solid balance sheet and a strong reputation etc. But if the other companies in the marketplace are doing 30% and making a profit in the tens of millions, ultimately the first company is not anywhere near as strong as one would believe on first sight.
This brings me nicely onto my next point. Cartels are ruthless in their decisions they make. They will commit to a decision and win or loss they move on.You may see this as bad advise, however what is interesting is at the time they are 100% committed to the decision and believe it is the right choice, and in investing, that mindset will lead to less emotional taxation. Knowing you have done your research and when you sit on the page of your broker and you are thinking “hell yeah” this is the right move, you feel 100% behind the investment, there is no emotional burden when that trade is processed. I have found that when I am 80% sure in the past, that is when I am looking at the noise daily and anxious about that stock it’s not a good position to be in. When you are committed fully, you will find they are your best investments. If they are not, either there’s a fundamental you have skipped in your research or something unexpected has happened. Either way you will learn from the first directly and the second will make you more aware of the macro environment. Fully commit and be confident enough to say No if you are not 100% happy. It is taxing and can play on your mind for a long time- this should be viewed as investing, not gambling.
On loosing money and how to do it properly: Recently £50million of cocaine was washed up onto the shores of Norfolk beach in the UK. For cartels, a £50 million loss of course is going to be trouble for the people who lost that, however that is only a small amount of the product they own. Losing money in one stock pick is frustrating, however it shouldn’t put you in a position of worrying. The art of diversification in a portfolio means that if one goes duff (everyone will inevitable learn from one poorer choice) you should be able cover the loss with your other investments over that time period. Exactly the same with the cocaine on the beach. Yes £50 million is a big loss for the cartel who lost it, but how big is it in the bigger picture? Their industry is worth £80 billion a year. Yes it is worth £50 million street price and that is revenue to the cartels, however the cost price of creating that would be little under a million. Not much of a loss of the major cartels. Diversify means losses in one stock or one sector shouldn’t knock a portfolio off track
I hope this has been useful for you, If you would like to get in touch please send me an email – firstname.lastname@example.org – I would love to hear from you
On a final note, if you want to read the book, I would thoroughly recommend it! Find: How to run a drug cartel- Tom Wrainwright here