The Art of Stock-Picking: Joel Tillinghast's guide to long-term investment success

Jul 27, 2024, 02:36:44 PM IST

Legendary fund manager Joel Tillinghast advises equity investors to achieve long-term success by avoiding major mistakes and identifying undervalued companies with high potential for solid long-term gains.

Tillinghast believes that to achieve great long-term portfolio performance, an investor doesn't need to pick the most exciting stocks or be bold and daring in their choices.

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Tillinghast advises that if one views stock-picking as a great game of skill and finds the stock market to be a fascinating puzzle, they should definitely invest in stocks. However, if someone is not interested in conducting in-depth investment research and sees the stock market as merely a game of chance, they should invest in an index fund.

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Tillinghast identifies four elements of value: (1) profitability or income, (2) life span, (3) growth, and (4) certainty. He also provides a few broad guidelines on how to pick good stocks while minimizing risk.

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Tillinghast advises investors to seek companies that dominate their market niche and maintain low levels of debt. He emphasizes the importance of finding businesses with a distinctive brand that consumers trust and a stable business model that isn’t heavily impacted by economic fluctuations.

He suggests that by using these criteria, investors can more accurately predict a company's profitability without significant risk of error.

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Tillinghast recommends looking for companies that pay high dividends and favoring stocks with low price-to-earnings (P/E) ratios in stable industries.

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Tillinghast states that his fund typically keeps at least 80% of its assets in low-priced stocks. He believes investors should maintain discipline in their investments and seek out bargain-priced small-cap and mid-cap stocks.

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Tillinghast advises investors not to sell a stock just because its value is appreciating beyond a specific target. He believes that if a stock has long-term growth potential, investors should continue to hold it. "I hold my winners as long as their long-term growth potential looks attractive," he says.

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Tillinghast emphasizes that investors must thoroughly understand a company before investing in it. If there is any uncertainty about the company's long-term profitability, it is best to avoid investing. "You have to understand a company enough to be able to forecast with confidence how the business will make money in the next decade," he says.

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Sometimes companies become very popular and attract many investors, tempting them to overlook their usual investing criteria. However, Tillinghast believes investors should avoid these kinds of stocks. Although they may be popular at the moment, they are likely to have limited potential for long-term profitability.

Tillinghast says glamorous and hyped stocks are more likely to be scams, because they are usually overpriced and are prone to raising capital constantly. So it is best to avoid them.

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Tillinghast emphasizes the importance of focusing on facts and meaningful actions to achieve success, rather than getting caught up in market chatter. He advises investors to trust their research and make wise decisions when choosing their investment strategies. According to him, everything in investing begins with thoughtful decisions.

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Tillinghast suggests that investors should view shares as partial interests in enterprises rather than just numbers on a screen. "Training our minds on businesses rather than stock prices moves us in the right direction," he advises. He acknowledges that investors may not be equally skilled in analyzing every security or industry, but by focusing on areas they understand well, they can ensure they've conducted thorough and accurate analysis.

Make careful decisions
Tillinghast emphasizes that decisions are pivotal in determining investors' long-term success. Therefore, he advises investors to approach every investment decision, regardless of its size, with great care and deliberation.
(Disclaimer: This article is based on Joel ­Tillinghast's various interviews and his book Big Money Thinks Small: Biases, Blind Spots, and Smarter Investing.)

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