A Decade-Long Journey to Minimal Risk Investing: Insights for Savvy Investors
Investing in a way that minimizes risk while maximizing returns is a challenge many aspire to overcome. In this article, we explore a comprehensive approach based on an eighty-year-old's experience of living off investments for 20 years while maintaining a minimal-risk portfolio. This approach is rooted in the lessons learned from a job in commercial credit reporting and a history of investing in what he considers to be financially strong and well-established companies.
Leveraging a Legacy of Minimal Risk Investing
The author's journey to safe investing began after a significant loss of life savings through a poor investment by a financial advisor. This experience led to a shift towards self-directed investing and a strong emphasis on safety over high-risk ventures. His approach is detailed in his books and includes a range of strategies that ensure hehas thrived for over two decades without the gamblers' luck involved in high-risk stocks.
Lessons from Commercial Credit Reporting
One of the key insights that shaped the author's approach to investing came from his job as a commercial credit reporter with Dun Bradstreet (DB). His role involved gathering critical information about the financial health and stability of companies, enabling him to recommend whether a business was a good credit risk.
From this experience, he learned:
The Peril of New Businesses: Over 80% of businesses fail within the first five years. Investing in new companies without a proven track record is extremely risky. Finding Financial Strength: Companies that have been in operation for a significant period and consistently show profitability are more likely to be financially strong and stable. Investing in Dividend-Paying Stocks: Companies that consistently pay dividends are usually more financially stable, as these payments are often made from profits. Ideal investments should pay dividends for at least ten years.The Importance of Financial Statements and Audits
When making investment decisions, access to a company's financial statements is crucial. These documents provide a detailed overview of a business's financial health, including income, expenses, and net profits.
The author emphasizes the importance of:
Reviewing Past Sales Data: Companies that show declining sales year over year are likely to struggle. Consistent growth in sales is a key indicator of a healthy business. Verifying Sales Figures: Financial statements often contain incorrect or misleading information. Cross-referencing sales data with credit references or suppliers can validate the accuracy of reported sales figures. Assessing Payment Terms: Companies that are slow in paying their suppliers may face financial difficulties. This can indicate a lack of profitability or liquidity issues.Practical Steps for Safe Investing
The author suggests the following practical steps for investors seeking to minimize risk:
Start with a Google Search: Before investing in any stock, perform a Google search with the company's name followed by legals and complaints. This can uncover hidden issues or financial troubles. Invest in Dividends: Opt for companies that have a proven track record of paying dividends for decades. Limit Investment to Dividend Payers: Focus on investing in companies that have consistently paid dividends for the past ten years, and that have increased these dividends steadily. Maintain a Diversified Portfolio: Diversify your investments across multiple companies to minimize the impact of any individual company's financial troubles on your portfolio.By following these strategies, investors can build a portfolio that focuses on long-term stability and growth, rather than short-term gains.