Ingredients to a Great Investment

You can pick a great business to invest in, but still lose money if you buy at the wrong time. And you can buy a horrible company and make money if you buy the stock low enough. Investing is a strange paradox that can be a humbling experience. But to consistently succeed over a long-time horizon and let your money truly compound, you need to buy a great company, at the correct time, and then exit at the correct time. We will go over each of these three in greater detail.

What to Buy

Iron Bay Research will only recommend publicly traded stocks, so what we recommend buying will only ever be individual businesses. When you buy a stock, you are buying a piece of a business. So, the purchase of a piece of that business can be analyzed by understanding the fundamentals of the business as a whole. A company you invest in must have a durable competitive advantage and trustworthy/capable management. A company’s advantage can come in many forms, such as superior operating procedures, intellectual property, locations, etc. But this will in one way or another lead to sustainable profits. You can tell if a company has a competitive advantage by its ability to maintain and grow its profits. Just how you wouldn’t invest in a restaurant that was in a horrible location with a horrible menu, it would be unwise to invest in a business that has weak competitive advantages. 

Who runs the company will greatly influence how your stock will do in the future. Knowing and deciding if management is capable and trustworthy can be more art than science at times, but there are plenty of indicators. What has been their previous track record, are they shareholder friendly, do they create or destroy value, do they accept responsibility, etc. Just as you wouldn’t invest with someone who is untrustworthy and not proven, you shouldn’t do the same with your stock investments.

When to Buy

It is not enough to buy a great company, but it needs to be bought at a decent price. How much you pay for it can be correlated to when you buy, but we like to measure when because it also accounts for how long you were invested, which in turn calculates the overall return on your investment. There are many ways to value a company and its stock price. Asset heavy companies versus technology companies versus mature companies versus new companies get valued differently (and rightfully so). But whatever valuation method is used, it is imperative not to overpay. Time and time again, investors make the mistake of investing in a great company but end up losing money for years because they purchased when the stock price was at an all-time high. We try to buy stocks at a low price, but if anything, at least a fair price.

When to Sell

Just like when to buy, when to sell is also correlated to price. You need to buy low, sell high, but you also need to do this in a timely manner. If a stock price doubles but it takes 20 years to do so, that would not make a great investment whereas if a stock doubled in 1 year, that would be a homerun. We will try to exit stocks when they are overvalued or if we feel that the chances of growth in the future are slowing. It is also important to note that some stocks will not be sold. If stock has doubled in a year and still has massive opportunities ahead, there is no rule that states it cannot double again. A great way to put this is for stocks to go up 10x, it must first go 2x, the 3x, and so-on.

All three of the above ingredients are needed to succeed in investing. Too often people only concentrate on 1 or 2 of the 3 and end up making a fatal flaw. The 2 types of mistakes that can come from not implementing these steps correctly are mistakes of omission and mistakes of commission. Mistakes of omission is when you miss an opportunity by not acting, such as not buying Google or Meta stock 15 years ago. Mistakes of commission are when you have acted, but it is the wrong company. An example would be buying a stock that goes down for years such as Yahoo or Paramount. When considering the overall return of your portfolio, both mistakes are important to avoid.