10 Practical Tips for Savvy Investors

Growing your savings through investment is important. Over the past century, the US stock market has delivered the highest returns, beating the housing market and other types of financial assets. Here are some key tips for every investor.

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1️⃣ The Investing/Trading Triangle

Investing is a triangle formed by three axes: (i) return, (ii) risk, and (iii) time. Whenever you push on one of these axes, the other two are affected. This means that in any investment:

• If you want high returns, the risk increases, and the time needed to achieve these returns becomes longer.

• If you want high returns in a short time, you will face very high risks.

• Never trust anyone promising high returns with low risk in a short period.

• The same principle applies to trading.

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2️⃣ The Interplay of Return, Risk, and Time

When investing, don’t focus solely on returns—consider risk and timeframe as well.

• Balance all decisions between Return, Risk, and Time to achieve better results.

• Ignoring time may lead to impatience or boredom, while ignoring risk can lead to bankruptcy.

🔗 More: Two Categories and Ten Sources of Risk at TradingCenter.org

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3️⃣ Portfolio Diversification: Investing’s Timeless Principle

There is only one investment rule that can be mathematically proven: portfolio diversification.

• Don’t put all your eggs (money) in one basket (position).

• Historical research shows that well-diversified portfolios outperform those with only a few assets.

• Institutional investors use extensive diversification, rarely allocating more than 2% of capital to a single position.

• Diversify across asset classes, industries, currencies, and even economic regions.

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Macroeconomy:

4️⃣ The Risk-Free Rate of the Economy

Theoretically, the only risk-free rate in the economy is the annual yield of government bonds. Any return above that rate inherently carries some level of risk.

• If you are promised high returns, you will inevitably face high risks—this is 100% certain.

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5️⃣ Understanding the Fundamentals of the Macroeconomic Cycle

Before making any investment, identify the current phase of the economic cycle. Central banks typically guide the economy through 7–9 year cycles, mainly by adjusting interest rates. Interest rates determine market liquidity, which influences consumer spending and overall consumption.

• The current stage of the economic cycle sets the level of market liquidity.

• The best time to invest is at the start of a cycle; the worst time is near the end.

• High inflation usually leads to higher interest rates (bad for investment), while high unemployment leads to lower rates (good for investment).

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When it comes to Businesses:

6️⃣ Why Cash Flow Often Outweighs Earnings

A business’s ability to generate profits is important, but even more critical is its ability to produce positive cash flows. When inflows consistently exceed outflows, the business is more likely to succeed in the long term.

• Most businesses fail because of weak cash flows, not low earnings.

• Always focus on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

• For new, promising companies, negative cash flows may persist for years. Ensure the management can secure sufficient funding from external sources.

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7️⃣ Corporate Strategy is the King

Cash flows and earnings are important, but even more crucial is a company’s business strategy. Corporate strategy determines long-term success. If a company’s strategic position is expected to be weak, it may fail well before financial problems appear.

There are three main strategic advantages:

1. Quality Premium – Offering better products than competitors

2. Cost Leadership – Selling at lower prices than competitors

3. Limited Resources – Owning a patent, contract, or any unique asset that competitors cannot access

A company lacking at least one of these strategic advantages is likely to face difficulties in the future.

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8️⃣ The Quality of Management

When investing in stocks, hedge funds, venture capital, or ETFs, two factors matter most:

1. Past performance

2. Quality of management

Give extra importance to the quality of management.

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9️⃣ Evaluating Investments with a Flexible Mindset

Don’t apply the same rules and metrics to every investment—wise investors adapt to each situation.

• The acceptable P/E for a stable company should be much lower than for a dynamic company. 

• For fast-growing industries, use the P/E/G ratio (Price/Earnings/Growth) instead of the classic P/E. 🔗 Valuing the Stock Market with P/E, PEG, and Shiller P/E

• Use the Price-to-Book (P/B) ratio only for financial companies.

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🔟 The Importance of Dividend Payments

When it comes to stock market investing, dividends are very important. For example, holding a company that pays a 4% annual dividend returns half your investment over 10 years.

• A good dividend provides almost certain future returns, which is valuable in uncertain markets.

• High-dividend stocks are more resilient during bear markets.

• Always include high-dividend stocks in your portfolio, making up at least 20–25% of its value.

 

◘ Investing Tips & Advice

George Protonotarios, Financial Analyst

for TradingCenter.org (c)