Rewind to look ahead: lessons learnt over 20 years of investing

In a career spanning more than two decades I have witnessed several market crises. These are the key investment lessons I have learnt:

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. Being disciplined is crucial.

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?”

Second, 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.

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.

In addition, 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. 

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 investment I made in the past 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.    

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.

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 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 if we have done sufficient work we should have the opportunity to change our minds.

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 Opportunity Fund, long before it became more of a consensus view. Today, SA bonds are 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. 

8. If you can’t value an asset, you can’t quantify risk 

Markets move through different stages and at times valuations don’t seem to matter. Eventually, though, fundamentals will start driving the broader market again. This leaves investors who own assets they can’t value 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. 

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, but it is sobering to note that more than 4,500 cryptocurrencies have been created yet about 1,647 have already been abandoned or declared “dead”.

Learn how to spot Ponzi schemes. They 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.

10. Don’t confuse luck with skill

When a share goes up many investors attribute it to their skill; when that same share goes down, they feel they were unlucky. Sometimes luck, not skill, can result in a windfall. Consider GameStop CEO George Sherman. GameStop runs a network of stores that sell digital videodiscs. Nowadays, most players download games from the internet, so the business has a declining revenue stream and not much of a future.

Despite these poor prospects, retail investors on the social media platform Reddit, hell-bent on squeezing out hedge fund managers, decided to drive the share price up. The mass investors who got the short interest down to 20% from 120% in effect allowed the CEO to be on the job for less than a year and walk off with more than $170m. The shares are trading at $250-odd, but we believe the company still isn’t worth more than $10 a share. 

Over the long term markets go up, but not in a straight line.  Balancing risk and return remains the cornerstone of successful investing.