Investing With A Lifetime of Experience

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“Investing is something I’ve been interested in since childhood”

Back in the 80’s my father taught me about investing in stocks. On weekends he would sit me down at the breakfast table and take me to the middle of the newspaper; the stocks page of the West (followed by the sports section!). He taught me about stocks every weekend for a long while and soon enough I would come to own some of the stocks he taught me about.

When I understood enough, he bought me some Challenge Bank shares at roughly $2 a pop in its initial public offer.

My Experience In The Share Market

Over the years I’ve done plenty of study through investment, both theoretical and practical, which has been really interesting. Although the bit that involves the scary math isn’t so interesting. The most interesting aspect is always the part that relates back to people.

In investment terms this is the research around the (in)efficiency of the stock market and how psychology and emotion (e.g. fear and greed) affect people’s investment decision making process.

This area is called behavioural finance and you can find more at… if you are interested.

One of the biggest lessons I’ve learnt about investing, often the hard way, is from personal practical experience over a very long period of time!

My first foray buying and selling shares was during the dot com boom and bust (99-02); a really interesting period in the equity markets and not for the faint hearted. Back then Telstra (TLS) was considered a growth stock trading on 20+ P/E. It peaked around $9 per share in 99/00 only to see the share price drop by 50% over the coming years as everyone realised it was actually a lumbering telco not another Amazon. Funnily enough if you dusted yourself off and bought TLS some years later post GFC around 2010 you could have doubled your investment from $3 per share to $6 as investors flocked to stocks seen as blue chip, defensive with a high yield.

You can see the psychology involved in these 2 periods with the same company, can’t you!

Due to my interest in the investment realm I’ve done lots of reading on highly regarded investors and thoroughly recommend ‘The Snowball’ which is a Bio on Warren Buffet who many consider the greatest living investor. I’d offer you mine but I’ve just lent it to Alex in the office! His story is truly amazing, he comes across as a decent guy and his investment track record over a long period of time is second to none. There is also a recent doco on him as well which is worth watching. If the book is too much check this video for details.

The thing about Buffet is not only is he super smart, his investment logic makes sense (to me anyway) and he is very good at communicating it so that us mere mortals can understand it.

I try and use a similar ‘value’ style logic when thinking about investing, be it for myself or clients, in conjunction with our investment manager partners.

Whenever I consider an investment option, these are the kind of things I ask myself:

1. Is the Stock/Investment Good Value?

Buffet talks about buying great businesses or assets but really at the end of the day it comes down to price or value. If you buy something good or great and pay too much you run the risk of not making any money which is an opportunity cost, or losing money if you have to sell in the short to medium term. I’d argue that an example at the moment is east coast property.

Sometimes people try to justify higher prices or higher earning multiples (i.e. P/E ratios) by arguing that the growth outlook for the asset/business warrants it. Sometimes that is right, but the future is uncertain and more often it is not. Going back to the Australian property example I’ve heard people justify house prices in Sydney by arguing it is a ‘global city’. Yet it doesn’t seem that long ago that the average Perth property price was similar to this global city as we went through a mining boom. The point is it’s never different, it’s a cycle and it will revert back so don’t be on the wrong side of the cycle and look for ‘value’! The first place I look for value is in areas where sentiment is negative but not necessarily warranted. Perth property is one example, another is Australian retailing. Follow good companies on the stock exchange and then wait for some inevitable ‘bad’ news or market disappointment and then ask yourself has it been overdone.

2. Is It Easy To Understand?

Buffet famously avoided tech stocks because he didn’t understand them during the dot com boom. In contrast he recently bought up big in Apple because he now sees it as a consumer staple given how popular Apple products are. In my experience there is a high correlation between complexity and risk and it is best to avoid investments or businesses you don’t understand. History is filled with ‘structured’ or complex investment products which have failed or blown up because of unrealistic modelling or unexpected events.

3. Does It Have A Moat?

Is the asset unique’ say like the Sydney airport, or does the business have a competitive advantage or ‘moat’ for instance like Apple. People buy Apple products because it is an Apple product. Another good example is Bunnings which is a great Australian business. Woolworths torched $2B trying to take it on but it is too big, too entrenched, too price competitive.

4. What Is The Industry Outlook?

No one has a crystal ball but if you take a common sense approach you can avoid industries in decline and the corresponding likelihood of losing money if you invest in it. For instance would you buy a taxi license plate at the moment with the arrival of Uber and a driverless car future? Of course you wouldn’t! But guess what; I’ve met people who have in the past few years!! And guess what; they’ve lost money!! Conversely there are lots of companies with strong industry tailwinds behind them to help their future prospects e.g. the move to online advertising from paper classifieds for

Anyway hope you found this interesting and these 4 questions are of some use the next time you are thinking about investments (recommended with an adviser) or looking at an investment opportunity.

Happy investing!

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