The best profitable investing strategies for investors may have their origins in surprising places.
I learned a high-level, profitable investing lesson from the work of military-strategist/futurist Herman Kahn, author of On Thermonuclear War, Thinking About the Unthinkable and On Escalation. I first heard about Kahn in the early 1960s, when I had just entered high school. This was the height of the Cold War. Like many people back then, I worried that a nuclear war could conceivably break out at any time, with little or no warning. Scientists warned that if war came, “the living would envy the dead.” I tried not to think about it.
In his book, Kahn said that thermonuclear war would not start overnight. Based on his study of military history, he said the world was more likely to go through 44 stages between the Cold War and World War III. He likened the 44 stages to rungs on a ladder, and divided them into seven subsets.
[ofie_ad]
In Kahn’s ladder, the first use of nuclear weapons occurs at rung 23 (Local Nuclear War, Military). Civilians only start to become targets at rung 29 (Exemplary Attacks on Population). Civilians become a focus at rung 42, (Civilian Devastation Attack). Rung 43 is “Some Other Kinds of Controlled General War.” Rung 44 is World War III, but Kahn called it “Spasm or Insensate War.”
I found all this greatly reassuring. It gave me reason to believe that if war was coming, it would follow some sort of pattern, rather than come as a total surprise, like a global car crash. Of course, I was still in my teens. Adults differed widely in their attitude toward Kahn and his views.
Some people felt Kahn’s nonchalant writing about thermonuclear war marked him as a heartless monster. (On Thermonuclear War popularized the term “megadeath”—the death of one million individuals.) But Kahn was a jovial, gregarious individual, and this came through in his writing. If he had written in a morose, emotional tone, nobody would have read the book, and that would have been a tragic waste.
Kahn’s work was widely read by high-ranking members of the U.S. and U.S.S.R. government and military. By describing and dissecting Kahn’s 44 stages, politicians and generals on both sides got better at spotting and avoiding unwise or unnecessary risks. In fact, many people give Kahn and his fellow “megadeath intellectuals” some credit for heading off World War III. Instead of world wars, major world powers shifted to regional proxy wars, like the Vietnam War, and the Soviet-Afghan war of the 1980s.
Kahn’s ideas gave me peace of mind in my teens. Decades later, in my investment career, they helped me spot and reject a lot of poorly thought-out investment ideas that were widely viewed as near certainties.
Here are some profitable investing ideas that meet our Successful Investor criteria:
Profitable investing with blue chip stocks
As part of our Successful Investor philosophy we like high-quality blue chip consumer product companies in part because they can help provide stability during economic slowdowns. Typically, consumer products companies sell staples, like soap, soup and beverages that consumers must buy no matter what the economy is doing.
Strong consumer product companies share a number of characteristics. These include geographic diversity to protect them from regional economic difficulties, a record of rising profits and cash flow and strong balance sheets. All these are characteristics of blue chip stocks.
Profitable investing with value stocks
One of the key principles of successful investing is to buy high-quality “value stocks”—stocks that are reasonably priced, if not cheap, in relation to their sales, earnings and assets. Typically, value stocks trade at prices lower than their financial fundamentals would suggest.
As more investors come to recognize the value of these stocks, they begin to rise. Well-informed investors who recognized the value while the stock lingered at a cheaper price begin to reap the benefits of their foresight.
Profitable investing: Zeroing in on Canadian banks
We’ve long recommended that all Canadian investors own two or more of the Big Five Canadian bank stocks—Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s mainly because of their importance to Canada’s economy.
Banks remain key lower-risk investments for a Successful Investor portfolio. As well, the big five Canadian bank stocks all have long histories of annual dividend increases.
When deciding which Canadian bank to buy, you want to start with the same criteria you would use in any investment:
We believe Canadian bank stocks are still well-positioned to weather downturns in the Canadian economy. They trade at attractive multiples to earnings and continue to raise their dividends.
What have been the most profitable forms of investing for your risk level?
There’s no single tip that will always lead to profitable investing, but you can build a strong foundation. What are some of the basics in your investing strategy?
