I first became interested in public companies and the sharemarket at university in 2000. We’d been studying balance sheets and doing case studies on various global companies and I felt like I begun to understand what made a good business to invest in. That carried over to my first professional job, a role at an independent investment platform. While it was more of an investment administration and reporting business, the founders were a very successful family who talked openly about investing and shared their stories of generational success and failure regularly with staff. I had a lot of exposure to fund managers, different strategies, and different styles there, before joining an investment bank just prior to the GFC (where I witnessed a lot of interesting behaviour) and finally then co-founded an investment management business in 2015.
All this experience has shaped my thinking on investing. I started my investing journey with just a couple of thousand dollars in savings and now I handle millions in capital. Here’s my advice for those starting out.
Invest in what you understand
Starting from scratch in an industry completely new to you is difficult. It’s much easier to invest in what you know and understand, and what you understand is often what interests you. This gives you a good starting point to ask the right questions and acquire a good sense of what’s regular and irregular.
Keep in mind that different people invest in different things at different ages and stages because what you’re interested in and what you spend your time researching changes. For example, if you’re having kids you might consider baby goods manufacturers. Like it or not, you will probably be spending time evaluating these products;pushing prams, testing formula, and fitting clothes, and you will gain an appreciation for the quality and potential success of these businesses based on your own experience.
Separate the trend from the cycle and ignore the noise
There will always be a lot of positive and negative hype on short news cycles (the ‘noise’) for investments. If you’ve identified an accelerating behavioural trend or thematic that presents strong medium-term growth you need to continually remind yourself to concentrate on what will be happening three to five years from now, not what’s happening today. What you read and what people say day-to-day, shouldn’t affect your investment decisions because they are largely short-term in nature and reactionary. If you take a five-year view, short-term movement is not going to matter too much but you must be prepared to weather a 20 per cent draw down (reduction) in your portfolio value, and have the confidence that it will recover over this timeframe.
Looking at the forces that drive the markets in cycles is also very helpful and Bridgewater’s Ray Dalio does an excellent job explaining how the economic machine works in his YouTube videos, that I would encourage you to watch. There are trends often linked to movements such as interest rates: when interest rates go down, asset prices generally go up, and vice versa. Economic cycles follow a similar vein so read up on what to expect, pinpoint where you are in the cycle and invest accordingly.
Find stability in volatility
Volatile investments can be attractive because in exchange for taking a risk there can be higher returns. If you are chasing higher returns, you must consider how you can protect your downside so that you do not erode your capital base. This can be done by purchasing options protection or owning preferred equity or subordinated debt (considered less risky) instead of pure equity. Consider lending money to the company and getting a fixed return as a defensive alternative to ordinary equity.It’s a more defensive way of investing in a riskier market.
What people often don’t realise is that even volatile industries can have stable elements. Cryptocurrency prices, for example, are very volatile but the platform businesses that trade in them are far more stable. I personally invest in the trading business rather than the fluctuating currency. These businesses make a small fee for each transaction and with a large volume of transactions these businesses can be very profitable without a reliance on the value of the Cryptocurrency prices.
Diversify your investments
I’ve always been quite diversified across several investments, but diversification is not just about where you put your money. Look to diversify where you pour your energy. As investors get more experience, there’s the temptation to specialise or become a sector expert but I think being a generalist is also very useful. If you pour all your energy into learning about mining, it will be tough when the commodities market slows down. You need to have a breadth of diversity in your interests and portfolio if you are to perform throughout cycles. Some medium-long term trends I’m currently focused on include the ageing population, increased health spending, e-commerce and cloud computing, ESG, renewable energy, domestic tourism and female workforce participation.
Do your research
Start with what the company says about itself, everything from presentations to annual reports and their annual general meetings. Many trading services offer charting tools and other research aids that link broker views. This will give you a picture of how the crowd is voting in stock, which will indicate confidence or potential downgrades.
As you gain more experience, you’ll get a better feel for how others react, the herd mentality, including anomalies: markets are driven by sometimes irrational thought processes. Generally speaking, it’s never quite as bad as you think it’s going to be, and you’ll never do as well as you initially believe.
Invest only what you’re prepared to lose
And finally, when you’re starting out, I suggest starting small. It takes a year or two to understand the settlement process, to find some positions that you like and follow them and get a feel for the cycles. Don’t invest more than you’re prepared to lose because sometimes the first lesson is the loss of that initial investment. Good luck and happy investing.
This article first appeared in The Property Tribune here.