How To Build Increased Certainty Into Your Investing
The Investment Perspective – November 2020
Peter Flannery CFP AFA
“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business”
You are a successful investor
No, I am not trying to ‘butter you up’ or curry favour with you. The chances are that as a client of WISEplanning, you have been a loyal client for more than 10 years. Your investment portfolio will have encountered a number of market and economic events, which has seen the cash up value fluctuate.
Sometimes declining more than it should have, staying lower for longer than the fundamentals suggested was appropriate, other times rising faster than it should have, growing to a higher level than the fundamentals suggested was appropriate.
The point here is that throughout it all, you stuck with your strategy, continued to invest, made the changes and adjustments as they were presented to you and allowed the portfolio to do what it does best – grow.
This, you have overcome so far
So far, you have overcome the temptation to become distracted, go off track and jump at ‘bright shiny new objects’.
Basically, you have stuck to the strategy, remained true to the methodology and your investment portfolio over time has continued to grow.
You may even have had thoughts around the growth not being fast enough; however, if you have looked around, particularly over the long run, you might have noticed that the growth, actually, is not too bad.
Unfortunately, we will never be the number one performer – but then neither was Berkshire Hathaway over any 12 month period – ever.
You may have tolerated investments within your portfolio that have been a non-performer for many years, and yet remained patient. You might have even had to put up with an investment defaulting. Regardless, you have stuck to the strategy and allowed your portfolio to continue to grow.
Complexity, colour and success
Having been involved in the investment field for several decades, sometimes certain themes emerge in the fullness of time.
One of those is that many people, particularly the more educated and academic, are attracted to coloured graphs, complex investing systems and methodologies that they struggle to understand.
It is almost as though the more difficult the graph is to understand and the more complicated or new and sexy the methodology is, the better they think they will succeed with their investing efforts.
It is almost as though the colour and complexity is some sort of rite of passage to investment success!
I am thinking about Warren Buffett’s letters to shareholders and the limited use of colour and the lack of complex graphs and charts to explain their simple but effective investing methodology.
I have a better example
Do you remember Long Term Capital Management?
There is a book called When Genius Failed by Roger Lowenstein.
It explains the epic rise and fall of Long Term Capital Management (LTCM). This operation was as complicated as they come and at one stage was America’s hottest hedge fund around 1997 – until the cataclysmic failure in 1998.
The outcome was a circa $1 trillion mess in its wake. The highly educated, academically acclaimed genius traders were considered some of the world’s most gifted mathematicians and economists – they nearly took down the US financial system with their mathematical academic wizardry.
The Rule of 5
You know this one.
The Rule of 5 developed by Peter Lynch decades ago, revolved around the idea that, in his words, “After all these years and all these billions, out of every five investments I pick, one is still a dud; however, one is much better than I would have thought and indeed, even spectacular, making up for the dud. As for the other three, they pretty much perform as they should.”
That is simple math working in our favour over time.
The reality is that we can lose 100% in one of those investments, but we will likely make more than 100% over the long-term in another of those investments.
The other three will be somewhere in the middle, generating growth long-term.
I am not suggesting this is our clever investing methodology. I am reinforcing the fact that the (uncomplicated) math works. It keeps the overall capital within your portfolio secure long-term and helps it to grow.
Investing in the business on the basis of its economics is a simple idea, but lost on most investors. Sure, there are lots of other ways to invest. The question though is how many of them are as reliable as value/eco-Investing in the long run?
Here is some colour and complexity
Here is some simple complexity
At WISEplanning, we call it The WAM Edge.
In simple terms, this is the interface between you, the investor and your investment portfolio.
If we really drill down, it is that interface between you, the investor, your investment portfolio and each business within your portfolio.
Investors who are less advanced are those who do not like volatility and tend to feel happy every time the valuation of their portfolio at the bottom of the page / screen is bigger than the last time they looked.
More advanced investors, on the other hand, are ambivalent about that valuation number at the bottom of the page and much more focused on the opportunity available when that number is lower.
They have progressed from not liking volatility, through tolerating volatility, to understanding volatility.
What about you?
“One of the funny things about the stock market is that every time one person buys and another one sells, they both think they are astute.”