What I learned from Australia’s best investors
How do the best investors get an edge and what are the habits of success?
Editor’s note: Livewire has invited 14 of Australia’s best investors to spend an afternoon at ASX in Sydney, to discuss their views on investing today and for the future. Livewire Live 2017 is taking place on 26 July. The event will feature a combination of seasoned fund managers and some of Australia’s top emerging stock pickers. Tickets go on sale via the Livewire website on 14 June. Join free at Livewire to be notified of ticket sales.
I have dedicated the past four years to interviewing and learning from Australia’s most successful investors. What are their habits, how do they get an edge and what are the disciplines that increase their chances of success?
It has become somewhat of an obsession and I’ve interviewed hundreds of professional investors, including hall of fame fund managers: Anton Tagliaferro, Geoff Wilson, Chris Cuffe and John Murray.
But most investors will not have the time or inclination to undertake such an exercise, so I’ll try to distil my efforts into some of the most valuable and practical tips I’ve picked up.
In essence, if I had the chance to talk to my 20-year-old self, these would be my “five investing lessons to live by”.
1. Get started and get compounding
Far too much time is spent deliberating the pros and cons of various investment strategies and products. If I could only give one piece of investing advice it would be to get started early.
The single most powerful influence on your investment returns is going to be compounding. There is a big risk that you will get overloaded with information and paralysed into inactivity. Don’t let that happen.
Fortunately, there are many low-cost ways that allow investors to access the compounding returns on offer via the sharemarket. Once started, you can start thinking about ways to optimise your strategy.
Invest through the cycle and get compounding.
2. Trade less
Ideas about the next great investment opportunity are ubiquitous. There is a temptation with investing that you always need to be doing “something”. Experienced fund managers tell us that once you’re set, you should sit back and let your investments do the work
“The real money is made in our business in sitting on good quality stories over the duration, and not day trading in and out.” – Ben Griffiths, Eley Griffiths Group.
A recent study showed that the median day trader lost 36 per cent over the past year and that 80 per cent of day traders lost money. A typical day trader compounding their losses at 36 per cent a year would have lost 89 per cent of their money after five years, while a typical index investor earning would have gained 61 per cent.
3. Don’t follow the crowd
“The stockmarket is the only market where things go on sale and people run out of the store!” – Cullen Roche, Alternative Perspectives.
Investing can be a lonely pursuit. Finding great investment opportunities requires you to think differently from the herd. More often that not, your best investments are the ones that make you feel a little uneasy.
This rule applies even to the biggest companies on ASX. For example, in early 2016 investor sentiment towards BHP Billiton and Rio Tinto was dire. Dividends were being cut and there was uncertainty around demand for commodities.
However, as commodity prices stabilised, investor appetite returned. Investors who went against the herd enjoyed around 35 per cent gains in these stocks in the next 12 months.
“It is uncertainty that creates the opportunity and the second the uncertainty abates, the opportunity disappears with it.” – Steve Johnson, Forager Funds.
4. Play to your strengths
This is an important concept: to be a successful investor you need to be realistic about your strengths and weaknesses.
To think that you are going to outperform the market you really need to understand what your edge is, rather than thinking there is some golden rule that is going to make you money forever.
Have a look at where you have been successful in the past and see if you can work out why. Is there a particular type of business or industry you understand really well? And importantly, know what you have the stomach for. If you don’t understand the business, you probably shouldn’t be invested there.
5. Know the downside
It is much harder to benefit from the power of compounding if you have to start by recouping losses. While most of your energy when assessing investments will be focused on working out the upside, you should also make sure you quantify the downside from your starting position.
“If you can find investments where the price you are paying allows for minimal or even nil downside, then chances are the upside will take care of itself.” – Harley Grosser, Capital H Management.