How would your portfolio do without you?

One of Warren Buffett’s favourite tips is to invest in businesses that you would be happy to hold even if the market closed for the next couple of years. The principle behind this is to invest in strong businesses that grow in intrinsic value over time. The investor doesn’t need to do anything except sit by and watch the returns compound. But apart from being a path to riches this also has benefits for an investors life at large and I think it is an essential consideration when entering an investment – because even though the market wont close for 2 years, unforeseen events can turn our lives upside down.

Most people, especially the young ones, like to live life as if we’re immortal and immune to the unfortunate events and illnesses that befall millions of people around the world every day. But those of us that have been through serious illness, either ourself or someone close to us, know just how fragile we all are and how circumstances can change suddenly. I have been dealing with a multitude of health problems over the last couple of years, and am plagued by chronic problems which leaving me frequently feeling ill and without the ability to focus. A big part of my investing strategy is to ensure I have a portfolio that I do not need to worry about if I am unable to devote attention to it, and I think other investors should give some serious consideration to this as well if they don’t already.

In the unfortunate event of a serious illness, your whole attention will quickly switch to yourself, healing yourself and spending time with family and friends. Your portfolio will probably be the last thing on your mind, so isn’t it beneficial to have one that just takes care of itself? In the UK we are lucky enough to have free healthcare, but if you’re in the US then illness is not only distressing but also costly. Having a portfolio that isn’t gyrating with the market, or instead paying healthy dividends could be a life saver when it comes to covering medical costs.

There is also the factor of stress, which can make even mild medical conditions become an enormous burden. Money is one of the most common causes of stress in the Western world. If you’re running your own portfolio, I would wager you don’t stress too much about paying the bills or money in general, so how unpleasant it must be to not only have life throw you a curveball, but then suddenly have the added stress of not being able to manage your money. Let’s turn to a less morbid note for a moment, and talk about holidays. Isn’t it preferable to go on holiday and not worry about how your portfolio is doing, even if the market starts crashing and you hear the odd news report, to know that you’re invested in strong companies that will weather any storm, while sunning yourself on the beach. I know that would be my preference.

I am a great believer in a stress free and relaxing life for overall wellbeing and health (hence why I never want to work in finance!) – that becomes so obvious in those times of hardship when relaxing is so difficult. Most people take relaxation for granted, I know from experience how essential it is and want to do everything in my power while I am healthy to minimize my burden in times of distress.

A realistic approach

Of course to build your portfolio purely around worst case scenarios doesn’t make sense, and will likely cost you money. The reality is that most people reading this will go through most of their pre-50 life without suffering any major medical conditions. A few will have a serious or prolonged illness that takes 6 months to a year from their lives and even fewer will have similar problems to me – recurring medical problems that will inevitably lead to future periods away from investing. But all of you are going to become ill at some point, whether it be a virus, food poisoning, headaches…etc.

So what can we do about it? Well I believe following a few principles is enough to save yourself some unwanted stress, and at the same time will improve returns in the long term.

1. Always invest with a Margin of Safety

Investing in something for less than it is worth is great for two reasons. Firstly if you’re right then your returns are higher. Secondly if you’re wrong then your losses are smaller. It’s win-win so everyone should be seeking it. It is an important concept as it rests on the premise that pretty much no matter what happens with the business, it’s worth more than you paid for it. It then becomes less necessary to follow every news piece and monitor the business (of course, you should always do this when you’re able!) and so spending months out of the loop isn’t as worrying. You may miss the perfect selling opportunity but you probably wont lose money.

2. Plan for scenarios

Scenario planning is often used in businesses to help them be better prepared to compete in the market and react to events quickly. However it isn’t used often enough in my opinion in investing. Go through both some unlikely and likely events that could happen to a business and think about how it would affect your valuation and whether you would want to stay invested or not. Doing this beforehand will make it much easier to react to events when they do occur and allow you to assess the impact quicker because you’ve already done the analysis.

3. Have a clear exit strategy

Firstly to clarify, I count “hold forever” as a valid “exit strategy”. But not every company is one you want to hold forever. So have a clear thesis and strategy for each investment. That may mean for example you exit the investment if a particular part of your thesis – like improving like for like sales – fails to materialise. Or it could be sell when the price hits X. Condensing this down to a simple set of rules and writing them down gives you not only a simple set of instructions to follow in times of distress, but is also useful for those like me that tend to forget their theses very often!

4. Follow opinion pieces on your stocks

This can be rather dangerous, as we should always seek to not be swayed by others opinion – we make money mostly by having an opinion different to that of the market. The most important thing to do is find someone else covering the stock that you trust. Then sign up to follow them, either by email or on a website like Seeking Alpha. Let them do the hard work of interpreting the latest news so you don’t have to, and if you’re out of action but can stand a little reading then it’s the easiest way to keep up to date on your holdings.

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.

2 thoughts on “How would your portfolio do without you?”

  1. Invest with a margin of safety, buy something for less than it is worth – sounds nice, but now? How do you:

    1. Find such an opportunity in a haystack of stocks, especially given a frothy market?
    2. Outsmart the market and figure that the company is worth more than the market gives it credit for? Isn’t everyone trying to do the same?
    3. Decide what something is “worth?”

    Got to give detail, not just hide behind WEB quotes.

    Plan for scenarios? Why didn’t I think of that? You like quotes so much, here is one from Helmuth von Moltke the Elder: “No plan of engagement survives first contact with the enemy.” Go ahead and plan that:)

    Clear exit strategy – I got one for you: “Buy low, sell high.”

    1. Finding margin of safety is possible, just not easy. That’s what this site and many others try to do by covering lots of companies.

      Valuing a company is a whole other topic and not what I wanted to get into in this article. I have a reading list for anyone wanting to learn how to value companies and find margin of safety

      The purpose of planning for scenarios is not to have a plan for any eventuality, is it to deepen our understanding of an investment and be able to react more quickly to unforeseen events

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