I recently got back into serious strength training after a too-long hiatus. In hopes of avoiding the mistakes I made during my many failed attempts at reclaiming my gym rat status, I spent some time studying what made the successful attempts work. As it happens, the lessons I drew from this reflection could prove useful to investors as well.
1. Great results come from dedicated and purposeful effort
Some workouts consist of 30 half-hearted minutes of cardio followed by a leisurely tour of the weight machines. It's better than nothing, but doesn't yield impressive results -- more often than not, it leads to boredom and wasted gym memberships. Serious lifters will tell you that instead of working out, you should train. Pick a specific, measurable goal -- like a bigger bench press or a faster 5K time -- and develop a program to meet that goal. It gives you a method, and a way of measuring your results.
In investing, setting a goal is pretty simple. You want your portfolio to outperform the S&P 500. Otherwise you would have been better off just buying an index fund like SPDR S&P 500 (AMEX: SPY ) or Vanguard Total Stock Market ETF (AMEX: VTI ) . Finding your method is a little trickier and depends largely on what kind of investor you are. However, regardless of whether you consider yourself a growth, value, or income investor, you need to develop or adopt a process for evaluating potential investments, which brings us to the next lesson.
2. Your routine must match your goals and temperament
I basically have one goal in the gym: get stupid strong. As a result, my training routine involves mainly picking up heavy objects and putting them down again. If I were to take up marathons, then I'd have to change my routine to incorporate more running and endurance training. Of course I wouldn't do that because, while running is certainly a great away to exercise, I'm not built for it, and it bores me to no end.
To see how this applies to investing, let's compare two semiconductor companies, Intel (Nasdaq: INTC ) and ARM Holdings (Nasdaq: ARMH ) .
|
Company
|
Market Cap
|
Forward P/E
|
Projected Dividend Yield
|
| Intel |
115.59 billion |
8.9 |
3.6% |
| ARM |
11.71 billion |
38.9 |
0.4% |
Source: Yahoo! Finance.
A value investor or someone nearing retirement and looking for a generous dividend in the tech sectors would probably find Intel more attractive. It's a massive company with a wide moat, selling at discount valuation. Given the company's multibillion-dollar research and development budget, it's likely that the company will remain a leader in the industry.
ARM, on the other hand, is a riskier investment, better suited for investors who can sit through stomach-churning market movements without flinching. Processors based on ARM designs dominate the mobile device market, where the potential for growth is massive. Thanks to this, the market has priced shares at a premium. This could mean that the company has become a growth trap, but there's also the possibility that ARM's lead in the mobile space and disruptive business model could make it worth every penny. However, if it's the latter, investors may have to sit through a few rough patches, given the company's sky-high valuation.
3. Results take time
One of the reasons I don't like most fitness magazines is the workout of the month. The truth is, any good routine will deliver results for months. In some cases, you can spend four weeks just preparing to do the real work. Hopping from program to program on whim will at best slow your results and at worst set you back.
Similarly, in most cases, nothing diminishes your returns like overly active trading. If you're constantly turning over your portfolio holdings, things like transaction costs and taxes will add up. What's more, you'll miss out on the big gains that come from holding stocks over the long term. For example, if you had invested $1,000 each in Coca-Cola (NYSE: KO ) , Procter & Gamble (NYSE: PG ) , and Philip Morris -- now Altria (NYSE: MO ) -- 30 years ago, and did nothing except reinvest the dividends, your initial $3,000 would have grown to well over $350,000. That works out to an annualized return of 17.2%.
The lesson is pretty simple. Put the most effort into finding companies you want to hold for years -- possibly decades -- rather than trying to time the market. Once you've added a company to your portfolio, ideally all you'll have to do is check earnings reports to make sure it's still living up to your expectations.
4. If you don't know, ask
Finally, the most important lesson I've learned while in the gym is that there's no shame in seeking out advice to fill in gaps in your own knowledge. You'll save a lot of time and effort by asking someone with experience rather than figuring it out on your own through trial and error -- and probably spare yourself an injury or two.
The same holds true for investing. The easiest way to learn to beat the market is to learn from investors who already crush it. Even if you don't pick the same companies, studying their reasoning can help you refine your own evaluation process -- or in some cases develop one. If you'd like a good starting place, then you should download this special report 5 Stocks The Motley Fool Owns -- And You Should Too. You'll learn why the Fool is so confident in these picks that it backed them with real money. The report is free, so click here to download it today!
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