The 1 Simple Investing Action You Should Use the Most

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Ardent readers of the Motley Fool Singapore would remember that we generally encourage Foolish investors to avoid frequent trading actions, and instead look for outstanding companies for the long term.

However, today’s discussion is about investing actions that we should use the most. Instead of frequent trading, is there something we should be doing more often instead?

Introducing the “Too Hard” pile

A great way to go about investing would be to first narrow down the universe of shares to the few things where you have a competitive edge over the market. In turn, what this means is that most of the ideas which come to you would well end up in what Warren Buffett refers to as the “too hard” pile.

As the name implies, that is where the investing maestro will toss most of the ideas which he deems to be too hard to understand or which come from areas where he does not have an edge.

Examples from the local scene

For instance, if the individual investor finds himself or herself unable to get a firm grasp of the oil rig and ship building industry, then it might make sense to toss companies like Keppel Corporation Limited (SGX:BN4) into the “too hard” pile, despite its long term track record.

Although the action of buying of such a company takes less than a minute with the click of a mouse, the longer part of the equation comes from holding the company’s shares for years or even decades. Without a firm grasp of the industry it belongs to, there may be less conviction to hold when the company inevitably wobbles; after all it is unlikely that any company will have a smooth rise to success over decades. And, when there is less conviction to hold, the investor may not hold on long enough for the magical effects of long-term compounding to be realised.

However, all is not lost.

The good news is there are many other companies in other industries which have also performed well over the years. The likes of Dairy Farm International Holdings Limited (SGX: D01), Vicom Limited (SGX: V01), and Raffles Medical Group Ltd. (SGX: R01) have all beaten the market handily over the decade, just like Keppel Corporation. And, the trio also come from a diverse range of industries and those industries might be the ones you find simpler and could understand better.

Share Capital gains over past decade*
Keppel Corporation 242%
Dairy Farm 316%
Vicom 580%
Raffles Medical 992%
Straits Times Index (SGX: ^STI) 75%

*Figures from 22 August 2004 till 22 August 2014

Source: S&P Capital IQ

Foolish Bottom Line

Just in case using the “too hard” pile sounds like an intellectual cop-out from difficult ideas, please do consider what Buffett’s sidekick, Charlie Munger (who’s every bit as good an investor as Buffett), had this to say about the “too hard” pile.

“We put almost all in the “too hard” pile and sift through a few easy ones”

In short, dumping possible investment ideas into the “too hard” pile is possibly the most used action the two investing mavericks have to enable them to focus on the best ideas where they have an edge.

I think we would do well to heed Munger and Buffett’s message. By doing so, we are able to narrow down the field into the things we are most knowledgeable about or have a competitive advantage in – in the process, we might just begin to develop the edge needed for us to beat the market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.