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The 9 most important lessons about investing

The nine most important lessons about investing by Mike Beal Sunshine Coast Financial Planner and Wealth Manager

I’ve worked in financial markets for over 25 years. Even before this I had a keen interest in financial markets. Along the way I’ve learned plenty of lessons about investing. 

When I was 15 I remember the 1987 crash – I sold my bicycle to get money invested. I even persuaded my friends to sell their bicycles and get a syndicate organised with dreams of vast wealth being created (a few weeks before the crash). 

How fortuitous this occurred when I was so young so I could learn from these cycles in the market.  Think also of the Global Financial Crisis (GFC), financial deregulation and re-regulation (after the Royal Commission in particular), US domination, the rise of Asia and China in particular.  The more things change, the more they stay the same. 

The following information is general information only – all advice depends upon your individual circumstances. For customised financial advice please contact Mike Beal your Sunshine Coast Wealth Manager

1. There is always a cycle

Good times, bad times!  They have always occurred and they will keep occurring – eventually, they contain the seeds of their own reversal. Ultimately there is no such thing as new eras or new paradigms, it’s simply a cycle.

2. The smart money is sometimes pretty dumb – be a contrarian

The share-market is a pretty weird place to be, especially when it comes to lessons about investing.  It should be like your grocery shopping experience: “Hmmm, a can of baked beans is normally $1, now it’s 50c, so I’ll buy 2 cans”.  When the share-market drops dramatically and everything is on sale people say “Oooh, it’s on sale, but it sure has dropped a lot – I think I’ll steer clear of the share-market, it seems too risky”.  In fact, quite the opposite occurs: “Wow, that $1 share is now trading at $2, I better buy some!”

People often feel safest when investing in an asset when neighbours and friends are doing the same and media commentary is reinforcing the message.  An example of this is the Bitcoin crash in 2017 – I remember Uber drivers and golfing buddies alike discussing the merits of Bitcoin.  

The problem is that when everyone is bullish and has bought into an asset in euphoria there is no one left to buy but lots of people who can sell on bad news. So, the point of maximum opportunity is when the crowd is pessimistic, and the point of maximum risk is when the crowd is euphoric.  As Baron Rothschild said “Buy when there’s blood in the streets, even if the blood is your own.

3. Buy high, sell low…DON’T do this!

This is the same for shares or property.  With shares, the prices can be measured in terms of ‘Price-earnings’ ratios. These give an indication of how cheap or expensive a share is.  This is much like the ratio when you are selling a business. 

Take for example an independent Sunshine Coast Wealth Management Business that’s making $100,000 p.a. profit. This type of business might typically sell for say, 2.5 x earnings.  $100,000 x 2.5 = $250,000 sale price, or put another way, a price-earnings ratio of 2.5 times.  Of course, this is for a small business which is riskier. Larger businesses with much stronger, sustainable earnings may sell for much higher prices. 

As I write this, on June 16th, 2019, the P/E ratio of the ASX 200 is 17.7 times earnings (source: Bloomberg) and the ASX is trading at 6,553 points.  The P/E is well above long term averages (although expensive markets can, of course, become more expensive). However, with numbers like these I would urge caution before investing. Particularly if you’re investing your life savings. You may wish to consider dollar cost averaging into the market. 

Another example is housing.  After the GFC the Noosa housing market dropped substantially. Many people from other parts of the country had holiday homes in Noosa. These were some of the first discretionary assets that people tried to divest themselves of which resulted in lots of sellers & few buyers = losses. In some cases by up to 50%! At the time it would have been a wonderful time to buy but when the headlines are screaming Armageddon, it’s psychologically hard to make the commitment.

Price to earning ratio
Source: Global Financial data, AMP Capital

4. Timing the markets – forget it!

It’s a ‘noisy’ world that we live in. There’s so much news, so many headlines. You’ve probably heard the adage ‘If it bleeds it leads’ from old school newspapermen, this is what sells papers.  When there’s a constant threat of a crisis, for example, Brexit, US-China trade wars, and so on, it makes it very difficult to make the decision. 

However, if the forecasters got it right they’d all be billionaires. If you had to wait for all of the crises in the world to end, then you’d be waiting for a potentially infinite period of time. Plus, you’d be earning lousy rates of returns over a very long period of time by holding cash.  Even Warren Buffett, the world’s most successful share investor says “I can’t time the market – and I don’t know anyone who can either.”

5. Investment markets don’t learn from past mistakes

One of the key lessons about investing we can take from the history of investment markets is that they don’t seem to learn. There’s always a fresh stream of newcomers to markets and in time collective memory dims and then history repeats itself again. 

6. Compound interest is MAGIC – Use this magic!

The average annual return on Australian shares is 11.8% pa. It’s just double that on Australian bonds (5.9% pa) over the last 119 years (source: AMP Capital). The magic of compounding higher returns leads to a substantially higher balance over long periods.

Yes, there were lots of rough periods along the way for shares as highlighted by arrows on the chart. But the impact of compounding at a higher long-term return is huge over long periods of time. The same applies to other growth-related assets such as property.

value of $1 invested in 1900
Source: Global Financial Data, AMP Capital

7. Optimists beat pessimists

Being positive is a great asset for any investor. Again, the more you look at those depressing headlines, the less likely it is you’ll ever make an investment decision. And, the more likely you’ll sell at the wrong times. This is why one of the most important lessons about investing is to try to be positive!

8. Keep it simple stupid (KISS)

Investing should be simple, but we have a knack for overcomplicating it. And it’s getting worse with more information, more apps, and more platforms, rules & regulations.   Think of the following to maximum ‘KISS’ value:

  • Spend less money than you make
  • Save the difference
  • Buy a diverse portfolio
  • Be patient

9. Know thyself for successful investing & get advice

We all suffer from the psychological weaknesses in regards to investing and lessons about investing. But smart investors are aware of them and seek to manage them. One way to do this is to take a long-term approach to investing.   

It takes effort, it takes a vigorous, disciplined approach, and it takes the ability to know yourself. How would you react if there was a GFC-style event and your portfolio were to drop 20% in a relatively short period of time?  

Rather be out spending time on the things you enjoy than focusing on the ins and outs and lessons about investing? Then your best investment decision would be to outsource all of this to your Sunshine Coast Wealth Manager and Financial Advisor, Mike Beal Financial Planning. Call Mike on 0409 799 279 or email: mike@mikebealfp.com.au

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.