By Geoff Wilson AO
Warren Buffett once said: “Rule No.1 of investing is never lose money. Rule No.2 is never forget rule No.1.”
If only it were that easy.
When I started my investment journey, my first stock pick made me think it just might be.
It was 1978, and I had bought shares in an oil exploration company at 10c. I was hoping they might climb to 12c and net me a 20 per cent return. Instead, on some positive drilling results, the share price soared above 30c.
At that point I had no idea how important it was to remember another of Buffett’s most famous sayings: “If you don’t make mistakes, you can’t make decisions.” But, from then on, I quickly learned how humbling the pursuit of investing can be.
The lessons I’ve learned in 40 years of investing continue to be as relevant today as they were back in the 1980s. Despite all the advances in the market (very few people today would openly boast about oil stock investments), the rules haven’t changed much. Every bull market is inevitably followed by a bear market; compounding is magic; the market will always be influenced by fear or greed; earnings are king; and it’s hard to beat good, old-fashioned, bottom-up research.
I am constantly amazed by how often these basic rules are forgotten at various points in the market cycle.
It wasn’t until I started my first job as an investment analyst at a fund manager in 1980 that I really began to fully grasp these rules. One of my earliest realisations was that when you buy a share listed on the stockmarket, you are buying part of that business, not just a piece of paper. As a part owner of that company, you benefit when the business performs, and you suffer when it doesn’t. So when you buy shares, choose wisely. Buy into companies that operate a good business and companies that you are confident will perform over time. Maximum returns are usually delivered by strong management teams.
Of course, identifying this perfect combination is difficult – and will constantly remind you of just how humbling the investment process can be.
One of the hardest lessons I’ve learned is to work against your emotions. You need to be able to buy when everyone else is selling, and to sell when everyone is buying. I’ve also learnt the importance of patience – of buying and holding. By taking a long-term view of your investments, you allow the benefits of compounding to work their magic.
As with everything in life, it’s important to do your homework, to ask questions, to observe, and to read before taking any investment decision. Those with the best quality information tend to win.
The investment process we’ve used since I founded Wilson Asset Management in 1997 focuses on buying undervalued growth companies when a catalyst or an event that will increase the share price is identified.
Our process is underpinned by the premise that the performance of a company’s share price is ultimately correlated to the growth in earnings per share. This gets forgotten. People worry about branding or customer numbers or revenue, but ultimately things will always come back to earnings. This view fell out of fashion during the recent tech boom, with dire consequences for many investors. Like I said, it’s hard to resist the urge to buy when everyone else is.
Over the past five decades, the ability to create wealth from investing has changed significantly. The quality and quantity of information out there – and the people who can get access to that information – has revolutionised the investment industry. But the broad principles of investing have stayed the same.
The aim of the game is still to buy well-managed and strong businesses that have the ability to grow.
Unfortunately, a lot of today’s investors haven’t been through a bear market so they aren’t prepared for what is inevitably going to occur. It is only a matter of time.
I was told in the early 1980s by a very wise investor that you make your money in your second bull market.
I didn’t quite understand what I was being told until I experienced my first bear market and I lost most of the money I’d made in my first bull market.
Accept when you’re in a bull market that a bear market will follow. Then, when you’re in a bear market, know that a bull market is just around the corner and will last a lot longer than the bear market.
I’d like to leave you with a quote from one of the great philosophers, Epicurus: “Nothing is enough for the man to whom enough is too little.” Please don’t over-extend yourself, as the market will never lose its ability to keep you humble.
Geoff Wilson is chair and chief investment officer of Wilson Asset Management.
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