Investor Quote of the Week

Quote Meaning

Don’t make investing hard for yourself.

You don’t need to come up with complex strategies using all sorts of instruments, like derivatives or short-selling stocks.

Focus on the simple strategies that produce easy wins.

Invest in companies you know and understand. If you are in a specific field, whether it’s tech or finance, you’ll be familiar with certain companies within your circle of competence.

Study them well, and invest in businesses you understand over long periods of time.

Nugget of Wisdom

Diversification is not always good.

It's true that you shouldn't place a significant amount of money on a single stock.

You should ideally spread your risk across many different types of businesses in various industries to prevent a significant drawdown in your investment capital.

Having said that, over-diversification is unnecessary.

You really can’t focus on 25–30 different companies in your portfolio, so you shouldn’t need to spread your bets across that many stocks.

I believe that 10–12 stocks is sufficient to ensure full diversification and potentially outperform the general market indexes.

If you feel that you need 25–30 different stocks within your portfolio, you might as well buy the general market by investing in an exchange-traded fund (ETF) such as SPY that tracks the general S&P 500 index.

If you do end up buying the index, then buy shares of the ETF over time, averaging your position.

Hold shares of the ETF for a very long time and you’ll most likely end up doing extremely well.

If you continued to buy shares of the SPY ETF over long periods of time, you’d be sitting on a lot of gains, especially today, as we are at one of the highest points in history in US equity markets.

Mistakes to Avoid

Stop listening to analysts.

Analysts are, in my opinion, the worst investors.

They are known as “market followers,” and to save their ass, they usually never issue “sell” recommendations.

They usually only issue “buy” or “hold” recommendations, even if deep down they probably shouldn’t.

The reason they don't issue "sell" ratings is because, if they work for what are known as "sell-side" investment banks, the banks want a good relationship with clients so that they can keep buying shares in different stocks.

Reason?

Because the banks receive trading commissions.

The conflict of interest is huge.

Not only that...

Analysts are not portfolio managers.

They typically don't manage their own money and are not considered "high-net-worth" individuals.

Why would a wealthy person trust someone who isn't financially free and makes stock recommendations for a living?

Unless they have a proven track record of managing money and getting good returns that either match or exceed the general market indices, don't trust them.

I wouldn’t.

A good example I came across was in November 2022, when many analysts issued “hold” ratings for Meta with price targets at or around the current price.

At any given time, analysts usually set price targets at or around the current price.

See below when Meta was trading below a 10x price-to-earnings ratio:

Given the risk of firing by their superiors, no analyst would set a price target that is 2-3 times higher than what Meta could be trading at based on historical multiples.

But as markets played out and expectations were overblown,

Meta jumped back to $400/share as expectations were overblown and rationality set in.

Very few (if any) analysts would dare make stock price predictions 2-3x what Meta was trading in 2022 because they are herd followers following the general consensus of the market.

This is not how investing works.

Stock of the Week

Sherwin-Williams Co. (Ticker: SHW)

Company Description

The Sherwin-Williams Co. engages in the development, manufacture, distribution, and sale of paint and coatings. It operates through the following segments: America Group, Consumer Brands Group, and Performance Coating Group. The America Group segment manages the exclusive outlets for Sherwin-Williams branded paints, stains, supplies, equipment, and floor coverings. The Consumer Brands Group segment sells portfolios of branded and private-label products and operates a global supply chain for paint and coatings. The Performance Coating Group segment offers coatings and finishes, and sells in the industrial wood, protective and marine, coil, packaging, and automotive markets. The company was founded by Henry Sherwin and Edward Williams in 1866 and is headquartered in Cleveland, OH.

Profitability Metrics

5-year average EBIT margin: 14%

5-year average net-income margin: 10%

5-year average return on equity: 60%

Growth Metrics

Revenue growth 5-year average (year-on-year): 6%

EBIT growth 5-year average (year-on-year): 14%

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Sam