Eight key lessons for equity investors:
Patience is a Virtue: Market panic creates opportunities to buy quality companies at prices far below their intrinsic value, as demonstrated by the sharp rebound of retailer Next.
Ignore Economists: Macro-economic forecasting is unreliable and should not guide investment decisions, as stock market performance often has an inverse relationship with economic growth.
Cheap is Best: Valuation is the most reliable guide to future returns. Buying shares at low price-to-earnings ratios (P/E) leads to significantly better returns than buying expensive stocks.
Good Companies Are Not Always a 'Buy': Even an excellent company can be a poor investment if you overpay for it, as shown by the decade-long underperformance of GlaxoSmithKline after it was bought at a high valuation.
It is the Average That Counts: Companies' profits tend to revert to a long-term average. Investors should value companies based on "normalised" earnings potential rather than peak or trough earnings.
Dividend History is Key: Focus on the sustainability of a company's dividend, supported by its strong cash flow (like AstraZeneca), rather than being lured by high but potentially unsustainably funded yields.
Size Doesn't Matter: The "risk" of a portfolio looking different from the index (tracking error) is less important than the absolute risks of overpaying (valuation risk), declining earnings (earnings risk), or bankruptcy (financial risk).
Don't Follow the Herd: Superior long-term returns require the willingness to be contrarian and not simply crowd into the same popular stocks as other investors.
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