For clients thinking of investing of investing in equities (Australian or global), I would like to share some timeless lessons to set you on the right path from the onset.

Think like an owner of a business

With inflation, the war in Ukraine, China, recessions and interest rate rises to contend with, today’s investors must confront many uncertainties. But is that any different to the past?  ‘This time is different’ are arguably the four most dangerous words in investing, preventing investors from taking the actions at precisely the time that could set them up for the next bull market and for the rest of their lives.

The first learning point is my belief that market success begins, not with buying or selling stocks based on rumours, hunches or macroeconomic headlines, but with thinking like an owner of a business.

If you’re a first-time equity investor or haven’t invested in equities much, it could be valuable to appreciate there are many investors who have come before you and have lost money on stocks by thinking like a trader or speculator, rather than thinking like a part-owner of good businesses.

Owning such companies is easy to do. Sometimes it’s a tip from a friend but often it’s a fad that captures the imagination of many ‘investors’ at the same time. Such bets, being in unprofitable companies, often require a leap of faith the firm will eventually be profitable.  Without hard evidence, that is, by definition, speculation not investing.

There’s nothing wrong with day-trading or punting on loss-making companies, provided you have the proven skills (or the algorithm) to overcome the enormous odds stacked against you including the impossibility of properly valuing a loss-making company; the potential for higher volatility in such stocks; and the huge dangers of low stock illiquidity that make it hard to sell quickly if needed. But clearly, most amateur investors don’t have the tools, or the skill sets to do this. For this reason, we partner with professional equity managers who have proven track records to manage your equity portfolio day by day.
Many of these investment managers with sustained outperformance, have outperformed by thinking like owners, holding exceptional companies for long periods, adding to their holding when prices fall on the back of news unrelated to the performance of the underlying business, or buying more of them even when prices rise alongside rising value. What we have learned is that they don’t seek to speculate but aim to buy exceptional companies and own them for as long as they remain exceptional.

Turn your back on speculation

Success within the equities component of your portfolio starts with a quality assessment of the company, and a valuation, which includes an assessment of the company’s prospects. If you don’t have an estimate for the value of a business and you buy its shares, you are, by definition, speculating and betting someone will be willing to pay more than you just did.

That’s a critical point. Speculation is not only owning an unprofitable exploration or biotech company and hoping it will one day make money. It also occurs when investors buy a profitable company, perhaps even a so-called blue-chip, without having a view on its valuation, or how that valuation or quality is changing over time. In effect, the individual is unwittingly speculating rather than investing. Once again, the investment managers we use buy investments based on the fundamentals of great businesses rather than on whether the market is high or low.

Don’t be swayed by market noise

So, what stops us from thinking like part-owners in a business when it comes to listed companies, and instead acting like a trader or speculator? Market noise plays a big role. We are seduced by media headlines, magazine stories on “hot stocks under $1”, trading social media stars on Tik-Tok, Instagram, Discord and Facebook, and broking reports. We latch on to supposed expert views, especially those that reinforce decisions already made.

Investors need to separate themselves from the daily distractions of market reports and the noise accompanying the trading day. As Ben Graham, the father of value investing once advised, it is important to take advantage of the market’s moods rather than be swayed by them. You may watch the market, but don’t base decisions on what it is saying, for it is too often wrong in the short- term.

Applying timeless lessons to today’s market

Fear is at an historic extreme and sentiment towards the stock market is glum. But it is times such as these that investors, rather than speculators, can begin to build a portfolio of extraordinary businesses, confident that as sure as night follows day, sentiment will change and that which was rejected will again be feted.

Investors buy shares to own businesses. Speculators buy shares merely to sell them. The latter is much riskier, and today’s market conditions favour the former.  The lessons of the past, and the refined techniques for investing they forged, are more valuable today than ever.