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1. Invest as much as possible, as early as possible. This is a very cliched point, but the power of compounding over very long time periods is so unintuitive to the human brain that the results can seem astounding. Consider two individuals, Jack and Jill, who are both faced with the same investment landscape which will offer an annualized 12% return for the next 20 years – every year (note: this is a very simplistic assumption, but it’s instructive). Jack finds success early in his career and invests $10,000 per year from the age of 25 but stops at the end of his fifth year, for a total of $50,000 capital contributions. Jill also invests a total of $50,000, but she starts ten years after Jack, with smaller payments starting at $1150 per year and rising each year until she is 60. The results? Jill winds up with just $183,000 when she retires at age 60, while Jack’s capital at the same age is worth – wait for it: $2.44 million, 13x more. How can this be? Simple: Jack’s full $50,000 of contributions had a massive head start in time, and today’s money is worth a lot more in real terms than the same amount in 30 years’ time, if invested appropriately. Start early, and as big as possible!
2. Hubris is the worst enemy of investment returns – the “desire to be right” all the time needs to be distinguished from the desire to produce returns and make money. If the former character trait is allowed to dominate, the odds are you will hold onto losing investments longer than you should because selling at a loss is admitting you were wrong. When it comes to investing, you are going to be wrong A LOT – so better to get used to that feeling and not let it cost you. Mistakes can (and should) be learned from, but then they need to roll off you like water off a duck’s feathers. Admit to them, learn the lesson and move on.
3. Investing in public equity markets shares some similarities with venture capital. In venture capital, the failure rate of investments in startup companies is very high, which means that you need a few very outsized winners to pay for the inevitable graveyard of dud investments that either didn’t generate any return, or worse – didn’t leave you with any of your original capital. This is typical of what the payoff profile looks like: for a portfolio of 40-50 startups, there are probably 2-3 that deliver all the return and then some, with a number of middling performers in the middle and a long tail that ultimately go bankrupt. In public equity markets, it’s not quite as extreme, but directionally the same - we also observe substantial concentration of returns. In the past 10 years, the S&P500 index has risen by a cumulative ~230%. However, 305 out of the 500 (>60%) companies delivered a lower return than the index, averaging just 73% (i.e. less than half the return!), with 60 of these companies delivering a negative 10-year total return. 34 companies in the S&P500 weren’t in the index 10 years ago, which means they replaced something else. By contrast, the top 5 companies delivered an average of 6700% total returns, with Nvidia +22,000%!
4. For the above reason with a long enough time horizon, averaging down on a robust market index (such as the S&P500) is a good idea, while doing the same for a losing stock can be downright dangerous and reckless. A broad market index is consistently refreshing itself with new, promising businesses – many of which can go on to become secular leaders (e.g. Nvidia). At the same time, poor performers get weeded out via index rebalancing rules, and on the way down their importance wanes (so their detraction from overall returns constantly wanes). The net result is the aggregate market return we observe. However, at a single stock level, one may be inclined to average down on an underperforming stock simply because it appears cheap – only to discover that the business in question may have secular challenges (and could even go bankrupt eventually). Averaging down on these stocks can become simply devastating to investment returns. Imagine you bought your first tranche of Steinhoff when it had fallen 50% thinking you were getting in at a great discount, only to see it fall another 25%, so you buy another tranche to “average in”. Ultimately, you would go on to lose all your money – both tranches! Also, don’t ignore what will be happening to your emotional state on the way down – even if your stock is a long-term winner, if you buy on the way down you may be more likely to capitulate during the downtrend when the “pain gets too much” (hint: the pain will be immense). Of course, we cannot know any of this ahead of time but need to manage this risk in a portfolio context – simply put, this means cutting underperformers (which you may be inclined to make excuses for because your “model” says they are good value) before they do too much damage. Time is the enemy of struggling businesses; this is not true of whole indices (and naturally, their best constituents – which will not always be the same companies!).
5. If you're an active investor picking your own stocks, start off in small size testing new, obscure ideas (e.g. newer businesses that are not prominent in an index and may be deemed “risky,” but whose businesses are showing promising fundamentals) and don’t be afraid to add at higher prices as the company executes and the market rewards it. These can often go on to be your best winners. By contrast, don’t make excuses for perpetual underperformers and be ruthless in weeding these out before they become big portfolio losses – not only will you save financial capital, you’ll also (perhaps even more importantly) free up mental capital to focus on finding new opportunities from a position of strength.
6. You only discover your true risk tolerance in a crisis. Mike Tyson once famously said that “everyone has got a plan until they get punched in the mouth;” this is very true in investing. You can declare yourself possessing a “high tolerance for risk,” but you cannot know what a 30% drawdown in your portfolio feels like until you experience it – and much less, how you will then react at that point. Think about this for a while when formulating a financial plan – you need to have a plan that you can realistically stick with when the going gets tough, because at some point it will. Match your investment strategy to your personality type because you need to be able to live with it – a strategy is worthless if it will be undermined by your behavioral traits. A trusted advisor can also be valuable in “walking you back from the ledge” in difficult times.
7. Leverage is a drug, and drugs are best avoided.
8. Cultivate a sense of curiosity & nurture it your whole life – if you keep reading about new businesses and industries, you are bound to find new opportunities. Markets change, and with that, new leaders emerge with each cycle. At worst, you’ll become a more interesting individual at cocktail parties. The more you learn the more you realise how little you know.
9. Investing is a life-long learning journey - I’m not the same investor I was five, or indeed, ten years ago. As we gain more experiences, our approach will evolve and incorporate more of these learnings. Old mistakes (hopefully) get rectified, while we inevitably make new mistakes – and learn from those. Be very worried if you find yourself thinking that you have “finally worked out this investing thing” – an event could be just around the corner that will make you rethink that statement. Fall in love with the process of life-long learning.
10. Don't ever think that a low valuation offers you full protection – I’ve seen countless examples of companies whose share prices have halved, only to halve again and then halve again. Some have even gone to zero (e.g. Steinhoff, Lehman Brothers, Wirecard, Enron etc)). In many cases, these businesses looked very cheap on some traditional metrics (e.g. Price / Earnings ratio), only for the company’s earnings to disappear. Low can always go lower, and price action of the stock will offer many clues in this regard. Fraud, scandals, changing technologies and many other factors can drive a company which was once great to bankruptcy. See point 4 above.
11. Don't be in a hurry to cut your winners. You may have heard the saying “trees don’t grow in the sky.” This is a terrible analogy when referring to investments – sometimes they do, with spectacular results. If returns were anchored by the same laws as we see in nature (e.g. we don’t see trees growing to being 1km tall, when the average of the genus is perhaps 15-20 metres), you wouldn’t have stocks that return 22,000% over a 10-year period. Too often, I’ve sold stocks of companies that looked very expensive, only for them to report spectacular results that subsequently justified the seemingly “unrealistic” rating. Companies often appear expensive for a good reason. Remember the “E” in P/E ratio is for earnings. Earnings can double, triple and quadruple making the P/E ratio lower and lower as a company grows. P/E is only one metric on which one should consider owning a company. Sometimes you need to pay up for growing companies.
12. Liquidity is important - if you’re an investor, liquidity is tantamount to an option to change your mind when either the facts change (i.e. structural deterioration of the business or industry), or you realise your original investment thesis was wrong. There is nothing worse than not being able to execute a change of direction when you recognise that you should. In this regard, small individual investors have a distinct advantage over large institutions – especially in companies which trade thinly. Think about this very carefully when you want to try your hand at start-up investments too: when it comes to venture capital, when you really want liquidity is when you usually cannot get any, leaving you with no option to “take the next off ramp from the highway.” Also remember, most start-ups fail to return any capital to investors.
13. Do your best to learn from others’ mistakes (this is the cheapest form of education) but recognise that most people only truly learn lessons from their own (generally very expensive) errors. Try to do the former instead!
14. Keep a journal of your investment journey, documenting key decisions, events and the market context at the time. Take note of your emotional state at the time too – this will be a useful reference point to come back to in time when you are faced with similar circumstances in the future. It also clarifies your thoughts when you are forced to write things down. I’d be surprised if that makes you a worse investor.
15. Don't ignore your gut feel. What is ‘gut feel’? I would define it as years of lived experience where you have been subconsciously forming linkages between human behavior and or contextual situations with subsequent observed events or patterns of outcomes, and this becomes distilled into a single innate sense or feeling. Do not ignore this! Often, I’ve been put off investing in companies where the fundamentals may have checked out, but something seemed ‘off’ about the CEO (for example). Heuristics, although generally frowned upon in behavioral finance literature, can be powerful. You may miss some winners, but you may well avoid some real disasters too.
Final Thoughts
Looking back on these two decades in the markets, one thing is clear: investing, and stock selection, is as much an art as it is a science. It’s been a journey filled with highs, lows, and everything in between.
With that said, individual security selection is not for everyone, but investing—specifically, saving and putting those savings into equities—absolutely should be. So, the key takeaway from these 15 lessons: invest, start early, and stay disciplined (back to point 1 above).
The average investor or saver looking for meaningful, long-term growth should remember:
- Invest as much as possible, as early as possible.
- Asset allocation will drive most of your return over time. Own the equity risk premium!
- Diversification is appropriate for most investors; however, it is a double-edged sword: while it removes the tail risk of single stock ‘blow-ups’, it also removes upside potential. If you want portfolio concentration (i.e. high exposure to single securities away from broad index weights) to chase the big gains, be very prepared to judiciously manage this risk when things start to go wrong. Don’t assume the market is wrong just because your spreadsheet tells you something different!
- Keep costs low! This is the only guaranteed way to improve return/add alpha over the long run.
Omba Advisory and Investments helps investors build actively managed global portfolios of Exchange Traded Funds (ETFs). ETFs are a great way to get liquid, diversified, low-cost access to markets. DM/BM