Lesson #1 Have a clear investment philosophy and process
You can’t invest successfully over time unless you have a well-defined philosophy and process. The key is finding a process that works and sticking to it day in and day out. So being disciplined is crucial.
Lesson #2 Align your temperament, intellect and experience
Being a successful investor is not only about harnessing your intellect and experience. Temperament is incredibly important in fund management because, ultimately, it determines how you behave in difficult circumstances. When you think about any investment decision, the first question you have to ask yourself is: “What edge do I have?” Secondly, you need to consider whether you have superior insight based on the work you have done. And lastly, “Have I seen this before?” You may have deep experience and investment expertise, but maintaining an even temperament is particularly important when you face a situation with a highly uncertain outcome.
Lesson #3 Investing is more than a numbers game
If you want to be an active investment manager, spend equal time studying history, economics, psychology and accountancy. While you need a solid knowledge of statistics and financial accounts to value assets, understanding the psychology of markets and investor behaviour is also key to maximising investment success.
On top of that, being a history and economics buff gives you an edge. History helps us make sense of countries’ policy regimes over time and the factors that shape the global macroeconomic environment. The monetary and fiscal policies of the major economies have a material impact on global financial markets. If you don’t understand the history behind certain markets, you won’t appreciate why asset prices don’t always revert to their long-term mean or average level.
Lesson #4 Things do go wrong – learn from your mistakes
Common layman mistakes are falling in love with a stock, sticking to losers for too long and not doing a proper assessment before investing.
I wish I could say that every single investment our team has made in the last 20 years has been a success, but that isn’t the case. You need to accept when you are wrong, know how much money you have lost, and importantly, learn from your investment mistakes.
Lesson #5 Avoiding risk doesn’t create wealth
You can’t avoid investment risk because then you won’t create any wealth over time. In fact, if you do nothing, your money will lose value because inflation will erode the purchasing power of your hard-earned savings.
Lesson #6 Scepticism, not cynicism leads to fewer errors
Another valuable lesson is differentiating between scepticism and cynicism. If you are a cynic on a market or company, you will make mistakes because your view will remain fixed – no matter what evidence is produced. At the same time, if you blindly believe every great ‘investment story’, you will also make mistakes because you need to assess whether those stories are based on facts.
Our investment team is firmly in the camp of sceptics, as opposed to cynics. Healthy scepticism means we keep an open mind on potential investments. We believe that if we have done sufficient work, we should have the opportunity to change our minds.
Lesson #7 Have a contrarian or differentiated position
How do you win in investment markets? You need to be an early ‘cheerleader’ for a contrarian investment idea that, ultimately, becomes more mainstream. We were big SA bond investors in the Ninety One Opportunity Fund, long before it became more of a consensus view. Essentially, if you find an investment idea before everyone else chases that idea, you are going to be well rewarded.
Lesson #8 If you can’t value an asset, you can’t quantify risk
Markets move through different stages – at times, valuations don’t seem to matter. Eventually, though, fundamentals will start driving the broader market again. This leaves investors who own assets that they can’t value very exposed to sharp market corrections. If you own something that you can’t value, you have no idea what the risk of losing money is.
Obviously, shares, bonds and property all deliver cash flows, which make them easier to value. That is why we include them in our portfolios, when there is a good investment case to be made. Currencies are equally important to understand if you want to be successful in investment markets.
Lesson #9 The best ‘investment stories’ carry the highest potential to lose money
There is no shortage of good ‘storytellers’ in the investment industry. Unfortunately, some ‘fantastic investment stories’ could see an investor lose a lot of money. Many investors have jumped onto the cryptocurrency bandwagon, piling into Bitcoin, Ethereum and many others. It is sobering to note that more than 4 500 cryptocurrencies have been created but around 1 647 have been abandoned or declared ‘dead’.
You need to understand how to spot Ponzi schemes. These schemes usually have pyramid structures, where the late adopters tend to lose all their money and the investors who get in early are the ones that make the money.
Lesson #10 Don’t confuse luck with skill
When a share goes up, many investors attribute it to their skill and when that same share goes down, they feel they were unlucky. Sometimes, luck, not skill can result in a windfall – which brings me to GameStop CEO, George Sherman. GameStop runs a network of stores that sell digital video discs. Nowadays, most players download games from the internet, so the business has a declining revenue stream and not much of a future.
Despite the company’s poor prospects, retail investors on the social media platform Reddit decided to drive the share price up. They were hell-bent on squeezing out hedge fund managers. The mass investors who got the short interest down to 20% from 120%, effectively allowed the CEO to be on the job for less than a year and walk off with more than $170 million. The shares are trading at $250-odd, but we believe the company still isn’t worth more than $10.
In conclusion
Over the long term, markets go up but not in a straight line. Balancing risk and return remains the cornerstone of successful investing. DM/BM