It’s not easy to beat the market. Investing in stocks can be very risky, especially if you are inexperienced.
The most common mistake investors make is trying to pick stocks that will move up or down in the short-term. How can you predict a company’s earnings with accuracy? And then predict the market’s reaction to its results? These are difficult to do.
Another mistake that investors make is doing too much. If your chances of picking a dud increase with the more stocks you add to your portfolio, there’s an argument to be made for keeping a small portfolio of high-quality businesses.
This is exactly what the number-one equity firm in China, Cederberg Capital, has done.
The fund has only bought three stocks in 2017: Alibaba Group Holding Ltd [NYSE:BABA], Tencent Holdings Ltd [HKG:0700] and Beijing Tong Ren Tang Chinese Medicine [HKG:8138].
Dawid Krige, the fund’s founder, is already up 46% this year. And over the last five years, he’s generated returns of 159%.
To generate such returns, Krige is constantly looking for companies that can generate very high returns. While this might seem simple, many investors still like to invest in companies clouded in uncertainty.
‘Good ideas are scarce,’ Krige said while being interviewed in London. ‘It is easier to identify a wonderful company and own it for the very long run, especially in a place like China where there will be multi-year winners.’
However, Krige’s strategy is not for everyone. With such a small portfolio, he experiences a lot of volatility year to year. He might be up 46% now but, if one of his holdings drops significantly, so too will his total returns.
There’s definitely nothing wrong with volatility. It can allow you to buy more stock of a company you like, and can give you an opportunity to sell when a stock screams higher. But most investors don’t like to watch their wealth dip and rise day-to-day.
This is also why Krige is based in London. ‘It’s far easier for me to control my emotions not to be in Hong Kong or Shanghai all the time and listen to all the chatter and greed and fear,’ Krige said.
‘To be based in London is a major advantage given our style, which is a long-term oriented.’
Junior Analyst, Markets & Money
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