Realising and maintaining success in the market is not a static process. Those who are successful, both in the share market and in life more generally, are consistently updating their knowledge and challenging their own way of doing things. Regular examination of existing and new information is critical to remaining at the forefront.
Howard Marks, owner of investment capital firm Oaktree Capital, and arguably one of the greatest investors of our time, has written to his clients on this very topic. Mark’s letters contain many universal investment truths that anyone considering investing their money in shares, property or anything really, should take note of.
Below are the messages that have always stuck with me and that I think anyone considering investing should also commit to memory.
Investing isn’t easy and anyone who thinks otherwise is simply naïve (probably because they are yet to have a bad experience).
At the right time in the cycle, making money via the share market can seem like the easiest thing in the world. You buy a bunch of stocks, they go up, you make money, and wonder why you haven’t been doing this all along given how easy it is.
You decide to take out a margin loan, perhaps you even quit your job so that you can focus on day trading. You extrapolate all of your returns well into the future and buy a better home and a second car.
This may have happened to you already or it may have happened to someone you know, but don’t let this fool you, investing is hard. Sometimes it seems easy simply because something bad hasn’t happened yet.
Buying tech stocks in the late '90s seemed that way (and does again now to some extent), and at various times between then and now so too has buying Biotech shares, oil stocks, gold stocks, emerging market shares, the shares of Australia’s big four banks and so on.
When everyone is talking about it and doing it, it’s generally already too late.
Don’t underestimate the impact that investor psychology (including your own) has on asset prices.
For very long periods of time, assets may not trade at anything approaching their true value. Value is of course a relative concept but at some point if the price of an asset falls far enough it will be cheap, irrespective of how poor the quality of the asset may be.
Likewise, if the price of an asset appreciates by enough, at some point it will be expensive, irrespective of how great its quality. The trick is to avoid selling when prices are too low and to avoid buying when prices are too high. The hard part is figuring out when this is and acting accordingly.
At times of extreme optimism it often seems as if the price of an asset will never come down, and at times of extreme pessimism that it will never go up. We know that neither is true, but it’s difficult to convince ourselves of this at the time.
One of the most important strengths possessed by all great long-term investors is their ability to ignore short-term ‘noise’. Unfortunately, this skill is not one held by many. Countless people who think they are long-term investors become decidedly less so when markets are in free fall.
If you’re intending to make superior profits then you’d better be bringing something to the table that the ‘average’ investor isn’t.
It’s not uncommon for investors to believe that a few hours a week and a well-funded brokerage account is a sure-fire recipe for investment success.
In the share market, all investors big and small are competing with professional investors for whom investing is a full-time job, and even that understates their true commitment.
For the best traders and investors in the world, investing is an all-consuming passion. A working week for them is not 35-40 hours, but closer to 60-80 hours.
They have cutting edge technology, teams of staff, and access to privileged information courtesy of their vast professional networks. The average investor needs to realise the likelihood of them going toe-to-toe with one of these professional investors and weigh up their chance for success in such a scenario.
While these home truths can seem disheartening, it’s critical that every investor (potential and active) understands them.
The dangers of being sucked into the latest fads being peddled by lazy brokers, planners or seminar providers are real, and investors need to be made aware of these dangers or risk losing out. Caution is a hugely underrated value when it comes to investing; there is always a need to stop and consider the things that could, and often do, go wrong.
Remember, it’s not supposed to be easy.
Luke Cummings is the managing director of Harvest Lane Asset Management.