Keeping it Simple

 By Leigh Gant, Education Manager
 24 March 2022

Keeping It Simple

Australia continues to be a nation of investors with close to 9 million adult Australians holding investments outside their super and primary dwelling.

More than half have investments in direct shares and there has been an increase of new investors. Close to a quarter of all investors have started investing in the past 2 years. 

Congratulations if you're one of them. And welcome to the funny world of equities.

Investing is a difficult pursuit because so much of what's important is just hard to get your head around.

I’d love to offer some advice. It's only five words.

Simple almost always beats complex.

It’s true for investing, mortgages, insurance, and everything else concerning money. 

My investing practice, which I am happy to report has outperformed the market over an extended period of time, is a rather simple process that has been built on the shoulders of others.

Put simply: I try to “clone” the best investors in a way that suits my life, psychology, and time horizon. I am shamelessly unoriginal. 

I could drone on about differing processes for identifying investable companies: ratios, growth metrics, macro tailwinds, total addressable markets, and so on. Better yet, I’ll paraphrase Charlie Munger and put it simply: 

Deal with industries you’re capable of understanding, then identify companies that have characteristics which give it durable competitive advantages and a management team with integrity and talent.

How about when you’ve identified businesses you understand and like? Well, before you invest in them, you must value the company. To win at this game you must purchase assets for less than their intrinsic value. Then, over time, the asset must either grow, re-rate, expand its multiple, return cash or a combination of these at a rate that the owner profits. Therefore, the crux is that the price you pay is crucial because it is the determinant of the assets’ end value. 

Put simply: Price matters. Price is what you pay. Value is what you get.

What if you’re not an active investor? Perhaps you’re primarily focussed on passively investing in index funds, ETFs, or managed funds. It's a tough pill to swallow that with historic average market returns, a 1 percent management fee will reduce your account balance by almost 40% over 50 years. Not all advisors and funds charge these fees. 

Put simply: WATCH OUT FOR FEES!

There is also more to price, costs, and fees than dollars and cents. The emotional cost of investing is as high as it's ever been. Everyone wants to have good returns. Far from everyone accepts that volatility and uncertainty is the admission fee. It's hard to believe that stocks can rise or fall 30% or more with hardly any change to their business fundamentals. The easy access, 24/7, bombardment of financial media has a downside: We are constantly barraged with more headlines than ever that feed on greed, fear, and doubt, making it easier than ever to get sidetracked into ruts of excitement, confusion, and pessimism. These tolls on the investor’s mind can be greater than any management or brokerage fee; however, if you can manage to turn down the noise and accept this entry price, investing is as worthwhile as it's ever been.

Put simply: Turn down the noise and manage your news diet.

Last but not least, a lot of investing success will come from avoiding disaster and harnessing the power of time. Compounding is the rocket fuel that creates fortunes and generational wealth. The time component of compounding is why 99% of Warren Buffett’s net worth came after he turned 50, and 97% came after his 65th birthday. The outcome of earning a 50% return in one year is cool; earning 10% a year, compounded, for 30 to 40 years is hard to comprehend. Once you understand how critical time is to compounding, the most important investing strategy becomes the one that sustains returns for the longest period of time. 

Put simply: Invest in a way that you never have to interrupt the power of compounding.

Good luck, fellow investors.

Leigh

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