Patience, long-term focus matters most
Vihari Ross, Magellan Financial Group
I have learnt many investing lessons over the last 20 years. What I lacked in experience back when I started, I compensated for by devouring everything I could find on investing and trying to know all I could about any new business.
Although reading widely and being thorough are still important parts of my process, what I’ve learnt is that the short-term is inherently unpredictable and that the key to investment success and the building of wealth through investing is patience – taking a long-term approach; and temperament – the ability to navigate and tolerate volatility along the way.
Many in the industry are looking to predict the market over the next year or ‘beat the market’ over a very short period. Patience matters because investing is not speculation and involves taking a long-term view on a company’s prospects, and then waiting for those competitive advantages and tailwinds to play out over time.
Temperament matters here because during those years the company in question will go through the insatiable market news cycle and move around a lot. Temperament also involves having conviction in a well-informed and researched view (purchased at the right price), but equally having the humility to change your view if the facts change.
Putting this into practice by investing in quality businesses will over time enable investors to benefit from the power of compounding returns – and when it comes to compounding, time is definitely on your side.
You can’t eat assets; cash flow is king
Hugh Dive, Atlas Funds Management
I wish I knew when I started investing that the most important financial statement is not the profit-and-loss statement or balance sheet, but the cash-flow statement.
Using the analogy of a human body, a company’s assets are like bones, but the cash flow is the vascular system; without sufficient blood flow, the body, like a company, can’t survive!
Many investors, including me, have bought companies with an NTA per share (net tangible assets, or a company’s assets minus liabilities and non-cash intangible assets such as goodwill and patents) higher than its market value, effectively buying $1 in cash for 80c.
This strategy is particularly seductive to value investors, which has led them into many asset-rich industrial companies such as defunct steelmaker OneSteel, which traded for extended periods below its net asset backing.
While avoiding OneSteel, I invested in timber company Gunns, attracted by the 250,000 hectares of land containing $500 million worth of trees and land on the balance sheet, valued at a premium to the prevailing share price.
Ultimately, these assets on the balance sheet counted for little when the combination of the Global Financial Crisis in 2008-09 and a rising Australian dollar dramatically reduced woodchip sales to Japan, leaving the company with insufficient cash flow to service its debts.
Gunns became an asset-rich but cash-flow-poor company that could not control its destiny. Unable to sell off assets quickly enough to pay current liabilities during stressful market conditions, it consequently went into administration.
Time in the market is what matters… not timing the market
Kyle Macintyre, Firetrail Investments
Many investors believe timing the market is the key to investment fortune. But at Firetrail we believe investment legend Peter Lynch says it best:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
While predicting the next equity market downturn may be attractive on paper, it is the hardest decision an investor can make, and has proven almost impossible to do consistently through time.
Also, predicting the downturn is only half the battle. Investors also need to know when to buy their shares back, so they don’t miss out on the rebound. Statistically, it is almost impossible to get both decisions right consistently through time!
The good news is there is a far simpler and more effective path to investment success. And that is to stay invested for the long-term.
The lesson for all investors, seasoned or new, is that it is time in the market that counts… not timing the market. There will always be investors that gain fame predicting the next market downturn. But the ones that gain financially will be those that stay invested for the long term.
Back your instincts and analysis
Nathan Bell, Intelligent Investor
The most important lesson is to back your own analysis. Early in my career, I suffered from 'Authority Bias', where I believed other analysts’ views were more important than my own because they had far more experience. This wasn't the case.
Not backing my own ideas early on, such as CSL (ASX: CSL) at $33 and Nanosonics (ASX: NAN) at 78.5c, to name just two, has already cost me millions of dollars.
In the decades to come, I expect those missed opportunities to eventually cost me tens of millions of dollars due to the compounding effect. Fortunately, I still recommended these stocks to our clients, but I didn't recommend Domino's Pizza Enterprises (ASX: DMP) at $3, as a colleague thought Domino’s would not be able to sell pizzas to Europeans.
Mistakes of omission will cost you far, far more than you can ever imagine. When you invest in a stock, the maximum you can lose is 100%. But CSL and Nanosonics have increased around 10 times since my recommendations, and Domino's at one point recently was up over 50 times from my non-recommendation.
Finding them small also helps, as does owning the leader in a highly profitable industry and management having skin in the game.
Combine that with a bit of a contrarian streak and you'll be pleasantly surprised at the money you can potentially earn from businesses that are easy to understand. The key is having a simple but highly disciplined investment approach.
Hold on to your winners and sell the losers
Julia Lee, Burman Invest
If you find yourself checking your investments much more when you are making money than when you are losing money, you are not alone. The prospect of losing money is thought to be twice as painful as the pleasure of gaining money.
This behaviour can have a big impact on your journey to growing wealth. It is important to sell the losers early and try to hold on to your winning investments. Too many people hold on too long to losing investments thinking prices will come back up when it is important to cut losses early and let your winners run.
Change is what moves share prices. If you want the value of a company to go up or down, you need something to change. If everything were to remain the same, the value of the company should not change. I try to identify companies where the change is positive for the value of the business. It might be a structural change like the move from bricks to clicks, which is benefitting online retailers, or a new product or strategy.
It's also important to find an edge. One of the hardest parts of investing can be finding something to buy, yet potential investments are all around us. The famed US investor Peter Lynch tells a story of how he came to invest in Hanes stockings. His wife couldn’t stop raving about how wonderful her stockings were. When he investigated, he found these stockings were sold in supermarkets rather than department stores.
At the time, women on average went to a department store once every six weeks but to a supermarket twice a week. He thought that was a compelling investment case and did further research. It ended up being a 30-bagger for his fund (this means he made 30 times his investment on Hanes).
These types of insights are all around us. I often gain an edge by talking to the people around me. I like to ask doctors about healthcare companies, retailers about demand and popular products, millennials about the ‘buy-now, pay-later’ space and my friends would know I love hearing about what is happening in the industry they work in.
More Investor Update articles
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
