Opinion: The two golden rules for long-term investing

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According to author Benjamin Graham, the first rule to clever investing is to never lose money - Credit: Getty Images/iStockphoto

Known locally as the ‘CI’, this once imposing Victorian structure appears, from the outside at least, to have fallen into disrepair; fortunately, however, the building’s outward appearance is deceptive.

During the winter, the CI’s compact bar and quirky rooms, housing an array of seating and a large TV screen, attracts a steady flow of ex-rugby players who once represented St Edwards College, the school situated on the other side of the road.

The CI once boasted a large annexe where local bands were given the opportunity to prove themselves in front of an unforgiving audience of mostly middle-aged folks enjoying their Saturday night out. Amazingly, although the annexe no longer exists, records of payments made to the bands, together with comments regarding their ability, have survived.

It was decided that one visiting four-piece, The Beatles, would not be invited back because, according to the steward doling out their fee, they were so poor. This was only a year before they took the world by storm and changed popular music forever.

I know this because as a schoolboy, I regularly played rugby against St Edwards, our local rivals; the Beatles story is no urban myth – they really were bad, apparently, at least on the occasion they played the CI.

A couple of years ago, the first Beatles contract with manager Brian Epstein sold at auction for £275,000. The document, signed by all four Beatles (Pete Best was the band’s drummer, not Ringo), but not by Epstein, was virtually worthless when it was first drawn up in January 1962, around the time they played the CI, though in the intervening years it has appreciated at a rate few could have foreseen.

This begs the question: is the Beatles contract a one-off, an investment freak? Apparently not.

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In 1965, the year the Fab Four enjoyed three number one hits (Ticket To Ride, Help! and Day Tripper), a virtually unknown American investor, Warren Buffett, bought a run-down textile company in New England called Berkshire Hathaway.

The same year, he met Charlie Munger who became both a loyal friend and, eventually, his deputy. Charlie persuaded Warren to change his approach to buying businesses, advising his friend to invest in better quality companies and hold them for a long time. It proved the basis of what is now known as ‘value investing’.

Financial advisor having a meeting with mature couple and offering them to sign a contract in the of

'Value investing' means to invest in better companies for a long time - Credit: Getty Images/iStockphoto

To say the value investing approach has worked well is an understatement. Since 1965, Berkshire Hathaway’s share price has outstripped the US stock market by more than 2.5 million percent.

In monetary terms, this means that anyone who was clever (or lucky) enough to invest $100 with Mr Buffett in 1965 would today be sitting on an investment worth $2.5 million.

Berkshire Hathaway has consistently beaten the market for more than half a century, during which time Warren Buffett’s investment style has been copied by, well, everyone.

Is it still possible to invest in what might become the next Berkshire Hathaway? The short answer is ‘yes’, as the performance of companies such as Apple, Microsoft, Google and Amazon prove, though researching future stars takes lots of time.

Apparently, Mr Buffett has for many years been guided by two rules of investment he garnered from The Intelligent Investor, written in 1949 by Benjamin Graham: rule one is never lose money; rule two is never forget rule one.

Mindful of these rules, one of Mr Buffett’s most sought-after corporate characteristics is its economic moat.

The term refers to a company’s ability to maintain one or more competitive advantages over other firms in order to protect and enhance its longer-term profits and market share. The analogy is a valid one for just like a castle, an effective economic moat protects those inside its sturdy stone walls (investors and their profits) from covetous competitors.

Pink piggy bank and coins on background

According to Benjamin Graham, author of The Intelligent Investor, the first rule for good investing is to never lose any money - Credit: Getty Images/iStockphoto

Essentially, a competitive advantage is a single or series of characteristics which enable a company to offer goods or services to the market and outperform competitors by generating more profitable returns.

Once a firm establishes strong competitive advantages, it will generate superior profits to those enjoyed by its competitors. However, this usually acts as a significant incentive for competitors to either duplicate the leading firm’s operations or, in some cases, develop better operating methods and create an economic moat of their own.

Hunt around and you can still unearth a surprisingly large number of companies boasting broad economic moats. Some are well-known, such as the quartet above, others less so. If, however, you’re unsure about investing, just remember the pre-contract Beatles at the CI and Berkshire Hathaway circa 1965.


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Read Peter Sharkey’s award-winning blog at www.moneymapp.com. This week: Changing ‘living life to the full’ from aspiration to reality.