What does it take to be a Good Investor?

In contrary to popular belief, you don’t need to be a great investor to do well in investing, which is to set an attainable income or returns goal and be able to achieve it over the long run.

For example, it’s very reasonable to expect total returns of at least 10% from stock investing.

Some investors require a concrete monetary goal to work towards. For example, you may aim to generate $50,000 of dividends a year or work towards a $1,000,000 portfolio. If that’s the case, break it down — initially, aim for $1,200 of dividends a year or a $10,000 portfolio, respectively. It all starts with saving and investing regularly.

Here’s what it takes to be a good investor:

  • Stick with what you know
  • Be patient
  • Build your risk tolerance

Sounds simple enough, right?

saving, investing, and compounding
Image attributed to ccPixs.com

Stick with what you know

When investing in a stock, you’ve become a part-owner in a business. So, especially for new investors, I highly recommend sticking with profitable businesses that generate stable earnings or cash flow growth over time. These tend to be stocks that pay a growing cash dividend over time to its shareholders.

Some big bank stocks in Canada have become quite attractive lately, including Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or Scotiabank. Banks are traditional businesses. In fact, Scotiabank has been around since 1833!

You know what banks do — at a basic level, they accept deposits, offer interests on those deposits, and lends out those deposits (up to a certain level) for higher interests to make a profit. Later on, they also helped their customers invest their money. They also make money from their investment platforms when retail investors (like you and me) make trades on their own.

If you know what you own, you’re more likely to hold on to your shares through thick and thin. Of course, it helps that Scotiabank pays a regular dividend. In fact, the dividends of the Big 5 Canadian banks, Scotiabank included, are known to be some of the safest in the world. They maintained their dividends even through the last financial crisis.

They all have payout ratios of about 50%, which leaves a big buffer to keep their dividends secure in bad economic times when earnings are reduced (temporarily).

Be patient

Investors must try to control their emotions of greed and fear as much as they can. Be very patient in looking for a good entry point in proven stocks. Value investing and learning how to read technical charts help, but you still got to be patient.

I think Scotiabank is a superb buy for the long term now that it trades at about 9.6 times earnings against its long-term normal P/E of roughly 11.9. Does that mean it isn’t going to fall more? No! However, from my years of investing experience, it’s impossible to buy at the lowest point (or sell at the highest). So, if you find a stock to be attractive, start buying and buy more of it over time at what you think are good valuations. You’ll get better and better at the investing game over time.

At $68.56 per share as of writing, BNS also offers a yield of nearly 5.1%. So, right off the bat, buyers today will have secured a starting yield of 5.1%, with a dividend that’s likely to grow about 5-6% per year down the road. That’s an estimated long-term return of 10-11% per year without accounting for the scenario of multiples expansion, which is very probable.

Build your risk tolerance

Some people refuse to invest in stocks because they can’t stand the possibility of losing money. I’d say that if you have an interest in making money in the stock market, you should definitely go for it. There are lower-risk ways to invest in the market, including choosing quality businesses (like Scotiabank) that you understand and using a value and dividend investing approach (which applies to BNS stock right now).

Yet, as quality as BNS stock comes, it still fell as much as 40-50% in the last financial crisis. Thankfully, even if you bought right before the big correction, you’ll still be way above water by now. But it goes to show that stocks go up and down — whether they’re backed by quality businesses or not. And investors need to build their risk tolerance to be able to take that volatility.

In my view, the volatility is not the real risk. The bad news is when we lose out to our fears and sell at a bottom in quality stocks and lose capital permanently.

Investor takeaway

Stick with what you know, be patient, and build your risk tolerance to be a good investor and get good returns of, say, +10% per year from the stock market.

Although I said to stick with what you know, you can always expand your knowledge by reading, watching videos, attending conferences, or talking to other investors. For new investors, I suggest sticking with quality businesses that pay you increasing dividends and patiently waiting until they’re attractively valued before buying them.

It certainly helps to build your risk tolerance so you’re able to hold on to your precious shares (and remain part-owners in proven businesses) in market corrections. A part of that comes from understanding the businesses you own, buying them at attractive valuations, getting dividend income from them, and sizing your positions so that you’re comfortable with their allocations in your overall portfolio.

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Disclosure: As of writing, we’re long on TSX:BNS.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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