Some things I know I think
I have now been in my profession for nearly two decades. While not long compared to some, I have learnt several lessons and survived the great financial crisis. Here are a few things I think I might know:
1, You will feel great being a long-term investor in a bull market. You will feel stupid being a long-term investor in a bear market.
2, When stocks rise, analysts will rush to raise target prices. When stocks fall, analysts will rush to lower target prices — all after the fact.
3, The pressure to act is often wrong. Sitting still is often the most intelligent thing to do, even if people think that doing nothing is wrong. Action, in itself, does not necessarily equate to returns in investing.
4, If you look a lot like your index, your returns will be a lot like the index; if you want to beat that index, you need to be willing to lose to that index as well.
5, Great investors move ahead when petrified. Great investors also are terrified about markets that have moved way ahead.
6, People will always consider historical returns. Even though they shouldn’t and are told: “Historical returns are not indicative of future returns.” The process and philosophy are more important, but most people don’t want to assess that because its hard and not a number.
7, People will continuously make market calls with political fundamentals … and often lose a boatload of money doing so. Politics is not necessarily the economy, and the market doesn’t care about how you feel about certain people in politics.
8, Narrative trumps numbers … in the short run. In the longer term, though, real rational fundamentals, which often are the outcome of numbers matter the most. If you want to get someone to change their mind or agree with you, tell them a story. If you wish to be right in the longer term, do the math.
9, One of the most often asked questions is: “What do you think the market will do this year?” One of the most critical questions is: “What is your risk tolerance?”
10, Valuation is essential but not the most important thing. Knowing the business and the company specifics is — you can’t value something correctly unless you understand it first.
11, High returns are found if one can determine if something is cheap for a reason or not. Negative returns are had by buying cheap assets that should be cheap.
12, Specialisation is overrated. If you are an energy sector analyst and oil is replaced, you will still be recommending all the best oil companies that go to zero. Generalists are more valuable — they can see the forest from the trees and allow for the flexibility that is needed in open investing.
13, There will always be compelling reasons to sell and tentative reasons to buy.
14, The market likes to extend trend lines … until they don’t.
15, Lots of rallies and sell-offs are explained after the fact … which is useless.
16, The markets rise over time because a vast majority of people wake up every morning to do good things … not destroy the world. Betting against the market is betting against human ingenuity, grit, perseverance, and advancement.
17, They say bull markets peak with euphoria. What they don’t say is what exactly is euphoria.
18, Say something publicly, and you will defend it fiercely. Hold a belief privately, and you will change your mind frequently.
19, Incentives may be the most important driver of belief. You show me how someone gets paid, and I’ll show you what they will say.
20, Self-interest and skin-in-the-game are vital for proper money management. If you don’t eat your own cooking, why should everyone else?
21, If there is a probability of success of 5 per cent, some people may try it. If there is a probability of failure of 95 per cent, most people will avoid it.
22, It’s more important to stay in the game with room to err than to play aggressively with even a small chance of epic failure.
23, Your opinion on a product or service generally means little to nothing. It means a lot if everyone agrees, though. How you view the world seems essential to you but not to the world.
24, A real and sustainable competitive advantage in business is rare and beautiful. When you find it, stick with it and size the investment right.
25, Crazy and unique ideas demand more of your time for consideration. Consensus and common opinions require only cursory attention.
26, Good news and progress accumulate slowly and are hard to detect. Bad news and tragedy are immediately impactful and easily observed.
27, You are not smart just because you are wealthy, nor did you get wealthy just because you are smart.
28, People spend a lot of time and money to try and determine the nebulous and unknowable to appear smart (or for marketing). You are better off focusing on what is essential, specific, and controllable.
29, People who dismiss luck tend to be arrogant and self-absorbed. The kindest people I know believe strongly in luck.
30, Remaining silent has caused more significant harm than speaking out.
31, Path dependency matters a lot for a portfolio, especially if you are withdrawing money.
I will go through a few of these over the year in greater detail.
Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the Chief Financial Officer of Anchor Investment Management Ltd. and can be contacted at firstname.lastname@example.org. Disclaimer: The sole responsibility for the content of this article lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to the accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trademark or copyright claims should be directed to the author by e-mail.
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