My uncle has worked in the antique market for over 15 years. Over that extensive period, he has indulged our family with the countless successes he has had. However, he explains that like the stock market, the antique business has its ups and downs. But like the successful investor, my uncle has persisted with the antique business and has in turn earned significant returns.

Firstly, my uncle sticks to a disciplined buying plan. He does not over pay for an antique at auction. For if he were to overpay, his returns on that antique would suffer. However, if he comes upon a rare opportunity, essentially finding a quality, high demand antique, in which knows has eager collectors, he will pay a small premium.

Secondly, he buys antiques that he understands. He has studied a significant amount about antiques, and has effectively acquired a niche in certain antiques. Thus, when my uncle attends antique auctions, he can efficiently appraise the fair value of those antiques he understands. My uncle explains that the best buying opportunity at an auction is when he knows more about an antique than other buyers present. With that advantage, he can effectively bid lower or at fair value to acquire an antique, while others remain perplexed by its value.

Thirdly, he likes to buy old and rare antiques. He explains that some in the antique market purchase relatively new items, hoping in the future those items become valuable antiques. However, he considers that approach to be a guessing game and thus sticks to buying antiques that he knows bear value now.

Fourthly, he explains that he buys antiques that possess a market of loyal collectors. Thus, he focuses his purchases on quality, brand name antiques. If he were to buy an obscure antique that antique would likely possess a small group of collectors. However, Coca Cola memorabilia, for instance, possesses a vast group of collectors that create constant demand. Conversely, my uncle explains that buying an antique that is in high supply in the market is not an intelligent decision. For instance, because those antiques such as Royal Doulton were mass produced in the past, their current antiquity is not rare and hence not valued highly by most collectors.

Finally, he stresses again that like the stock market, the antique market is full with amateur antique buyers. However, he likes this since he can buy valuable antiques without those amateurs knowing their true value.

My uncle represents, like the successful investor, an individual who can beat the market. He beats the antique market in that he is able to achieve higher returns on his antique purchases because he knows how to valuate an antique; measuring its auction price against its true value and formulating a return on investment on the spot. In all, his example is another reason, besides the psychological deficiency theory, to discount the market efficiency theory. For instance, the efficient market theory would assert that buyers at an antique auction contained all available information on present antiques and hence the true value of those antiques would be known and effectively priced in. A bargain antique, then, would not exist. However, my uncle purchases antiques at bargain prices consistently, because he knows more than the average buyer. And in turn, he can sell those mispriced antiques and gain 500% return at times.

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Chapter from my e-book Lessons From The Successful Investor
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One can learn modern portfolio theory, and still not be able to invest like the successful investor. Modern portfolio theory is the culmination of ideas that in no way correlate to investing success. Instead of modern portfolio theory, the successful investor practises good old portfolio management.

For instance, the successful investor holds only quality businesses in his portfolio. He does not diversify by industry, sector, or country. And he certainly does not rebalance asset classes. He manages quality businesses in his portfolio, in the form of equity. Bonds, gold, and GIC’s are not quality investments. The successful investor manages his portfolio like he would a holding company. He creates a consolidated report annually, consisting of his portfolio’s average revenue, net income, profit margin, and return on equity. His main focus is on both profit margin and return on equity, for he knows those two metrics determine the core growth of his portfolio.

Annually, the successful investor plots his portfolio’s capital appreciation, or price advance, against the S&P 500. He makes sure to beat the S&P 500’s total return by 5%, but is not devastated if he misses that mark. Also, he averages the dividend yield on his portfolio and calculates the dividend income he receives from his portfolio each year, while noting its annual growth. Annually, the successful investor reinvests his dividends in new holdings or shores up current holdings if valuations are attractive. And, if cash is available that was not deployed throughout the year for stock purchases, the successful investor conducts a stock screen on the S&P 500 and S&P/TSX to filter attractive stocks of quality businesses. If attractive stocks are found, he will purchase those stocks, if not, he will reinvest in current holdings. The successful investor does not succumb to investing in hundreds of businesses. He manages a focused portfolio of about 7 to 30 businesses with clear competitive advantages, and only adds businesses that will maintain his portfolio’s average profit margin and return on equity. Logically then, he does not erode his portfolio’s value.

The successful investor does not check his portfolio daily; for he knows his businesses are running smoothly and are constantly building shareholder value. Quarterly, however, the successful investor checks his portfolio for dividend income earned from the businesses he owns. This makes him happy and proud owner of these successful businesses. Moreover, the successful investor dislikes very much selling his quality businesses. If a quality business generates consistently growing income, why should he sell that business? However, the successful investor does sell a business when its underlying fundamentals deteriorate considerably, pulling down his portfolio’s profit margin and return on equity to historical lows. However, the successful investor is o.k with holding good quality businesses, for he knows his great quality businesses maintain his portfolio’s high returns. If he were to sell every great quality business that turned good quality, he would incur significant brokerage costs. Only quality businesses that are deteriorating significantly are sold.

In all, the successful investor invests in quality businesses with clear competitive advantages, reports on their performance, builds his stake in those quality businesses and invests in new quality businesses annually, watches his dividend income, not stock prices, and in turn, becomes wealthy.

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Chapter from my e-book Lessons From The Successful Investor
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