Jarislowsky advises young people (in their 20's if possible) to get as early a start as possible with sound investing because of the power of compound growth. Jarislowsky advocates linking an investment action plan with stock investments that will yield a predictable rate of compound growth. He explains what to look for later in this chapter (explained below).
He believes that no one can reliably predict what the market will do, because of the inherent complexities in the market. He is not a believer in market timing but he does believe in comparing historical average P/E ratios and dividend yields to the current rates in order to determine if the market is cheap. He suggests that one way to outperform the market is to buy index market funds when the P/E rates are below the 14 to 15 times average and reduce these funds when the P/E rates are above average say at 24 to 26 times earnings. He believes fine tuning this approach with excellent quality non-cyclical individual stocks will improve the results further. He doesn't believe in excessive diversification but advises to have 4-5 major groups and a few specialty groups in your portfolio.
He explains that high interest rates make for low priced stocks. He concludes that the 1970's and 1980 and 1981 were great times to buy stocks for this reason. He uses inflation, P/E market ratios and dividend yields as signposts for whether the market is cheap or not. He believes that stocks are better investments long term than real estate, bonds and gold based on the analysis he has done.
Jarislowsky's rule is to invest in only top-quality, mostly non-cyclical growth stocks that have a predictable rate of earnings and dividend growth. He equates the stock market to a zoo, with lots of variety, but as an investor he suggests you only need to find a few of the "best species" and build a diversified portfolio. This will provide a sustainable, low risk portfolio with high compound growth.
He comments that very mature industries will bring below average returns. He feels that raw materials and commodity prices have not kept up with inflation and don't make good long term investments. He advises to eliminate holdings that are in fashion and to avoid companies with excessive debt.
He advocates focusing on non-cyclical companies. If you do this, he suggests you only need to look at around 50 of the 1000's of stocks that are available worldwide. He wants to buy companies that can reliably obtain 14% to 16% long term growth with top and bottom line earnings. He avoids cyclical stocks because its too hard to judge when to sell at the top of the cycle before prices come crashing down again and when to buy at the bottom of the cycle. He is also concerned that many of the cyclical stocks won't survive the market down turns. He avoids junior stocks since their margins can easily be ruined by a new market entrant.
He likes the companies he invests in to pay a dividend. As Jarislowsky puts it "everyone gets paid in a company, why not the shareholders who take all the risk?" He thinks dividends should rise as fast or faster as the CEO's salary for this reason. He wants to see top line and bottom line earnings growth since that indicates a well managed company.
Jarislowsky advises to make others happy by selling them your stocks they want so badly at the top of the market and to be helpful by buying the stocks that others can't stand seeing anymore at the bottom of the market.