There is no shortage of information, advice and opinion in newspapers, magazines and on the airwaves about successful investing – what to invest in, how to do it, what to avoid – but separating the good advice from the questionable advice is difficult. How do investors cut through to what really matters?
After nearly three decades in the investment industry, I believe there are 10 things you should do to be a successful long-term investor.
There will always be ’noise’ in the market, including chat and rumours – mostly unsubstantiated – on investment blogs and websites. More often than not people who contribute to such forums are simply talking up their own portfolios, which probably include junior miners and penny-dreadful stocks, hoping others will invest and prop up the share prices, or even allow them to exit their holdings.
There are many sectors to invest in, but which ones have the best long-term future? Technology? Healthcare? Finance? Once you have picked your sector, the key things to look at when considering investment in a company are revenues, profits, dividends and stewardship/management. What footprint does the company have in its sector? What is your first-cut exit price and stop-loss price? What are your expectations for your investment? Can a stock you are looking at really give you a 20 per cent annual return? Be pragmatic and realistic.
Over the years millions of investors have lost money because a stock they had high hopes for headed south and they refused to sell, thinking that its fortunes would turn around. But when a share price hits zero and the company goes into liquidation investors lose the value of their investment. Good investors know when a stock is not living up to expectations and sell, accepting the resulting loss. The Australian stock market is littered with the corpses of companies that went belly-up after promising much: including Bond Group and Bell Group, Allco Finance, Babcock and Brown and, more recently, Quintis.
Equally, there are many examples of companies that have done extraordinarily well over a long period and investors who held onto the shares, and resisted selling on the way up, benefitted hugely. In many cases, shareholders who did their due diligence and were happy to remain long-term shareholders might have increased their investment more than 1,000 per cent. The Australian example that springs to mind is CSL, which listed on the ASX in 1994 at $2.30 a share. The company’s shares are now more than $280. The company had a 3-for-1 share split in October 2007, so in fact CSL shares are today the equivalent of more than $800 each. That’s a return of more than 350 times the initial investment, not including dividends.
The bond market is the world’s biggest investment market, and is a great indicator of economic health. It takes into account expectations for growth, inflation and interest rates, so investors ignore it at their peril. The US two-year to 10-year yield curve flattened out earlier this year to 44 basis points, but is now trading at around 60 basis points suggesting bond investors are seeing some early, albeit weak, signs of inflationary pressure. Both US and Australian bond markets are expecting weak growth and inflation. (When the two-year yield goes above the ten-year yield, which is known as ‘inverting’, a recession is more likely). Another key factor here is the US budget deficit. Add Trump’s tax cuts and increases in spending, and the US budget deficit is likely to hit $1 trillion this year. The US debt load is currently more than 100 per cent of GDP. The last US President to make any meaningful impact on the US budget deficit was – believe it or not – Bill Clinton in the 1990s. John Howard and Peter Costello deserve huge recognition for tackling Australia’s debt like they did.
Australia represents 1.5 per cent of world stock markets, so any balanced portfolio should include some level of exposure to overseas stocks – either individual stocks or via international funds. Successful Australian investors think and look globally. Not only does exposure to overseas markets enable investors to benefit from market movements there, but it gives exposure to sectors that are small in Australia. For instance, the technology sector in Australia is tiny, but in the USA and elsewhere there are the likes of Apple, Google/Alphabet, PayPal, eBay, Nvidia, Tencent and Alibaba Group. Similarly, the international healthcare and pharmaceutical sector includes giants like Roche, GlaxoSmithKline, Express Scripts and Novo Nordisk. Global finance companies that Australian investors can only buy on overseas markets include Goldman Sachs and JP Morgan.
Successful investors manage both money and risk. They keep track of your money that is going out and maintain a cash balance to meet all expenses. Risk management is equally important. What happens if markets turn south? What happens if your companies reduce their dividends by 10 per cent? What about 50 per cent? Highly-geared investors with long positions during the Twin Towers tragedy in 2001 or the 2008 market meltdown – when markets dropped by 60 per cent – lost a lot of money. The Covid-19 situation is equally challenging with many companies reducing dividends and some not paying at all.
Whether tulips in Holland in the seventeenth century or railways in the USA in the 1840s, investment booms always eventually create havoc and never meet investors’ expectations. Fear of missing out is a big driver for many investors, but the reality is that the vast majority of fads end in tears. Bitcoin is one of today’s fads. Bitcoin hit USD20,000 last year and today is closer to USD10,000. Needless to say Bitcoin – and similar fads – are extremely volatile and anyone who has them as a major asset is taking an enormous risk.
Every week there are economic indicators in major economies that have the potential to move markets and must be watched and analysed carefully. The bond market looks at expectations for growth and inflation. Other data in key economies like the USA and China are crucial, including employment data, retail sales, wages growth and industrial production. The numbers must be measured against trends and expectations, both of which have been built into asset prices.
A good rule of thumb is to never discuss your investment portfolio with anyone who isn’t charging you for their advice. Any advice these people give you is worthless and will likely be tainted by them talking up their own book. For marital happiness, keep your spouse aware of what investment decisions you are making and the broad breakdown of your portfolio.