By Trevor Muchedzi, CFA
Today marks one year since I launched my global investment blog, The Northerners. I guess it’s totally acceptable to congratulate myself!
When I started off last year, I didn’t have any meaningful writing experience and therefore wasn’t sure how I was going to generate meaningful content to sustain my set target of publishing two articles per month. Twelve months later, here we are – I have written 25 investment related articles and 13 book reviews, that’s an average of 3.2 posts per month. Better than expected, I guess.
As I reflect over the past twelve months, I thought today was an appropriate time to share with you some of the key things I have learnt in that period. In consistent with the objective of the blog, I will stay within the global investment lane.
Reflection number 1: Investing is hard and everybody is wise in hindsight
As the closing bell rang on the 30th June 1997, Amazon shares closed the day at $1.50/share (split adjusted), which gave the company a market valuation of $700 million. On that fateful late afternoon, one well respected analyst released a detailed research report on the company which recommended investors to sell all their stocks, take the money and run away. The author made a compelling argument that Amazon was headed towards bankruptcy and that the founder and CEO, Jeff Bezos, didn’t seem to know how to operate a profitable business. Twenty-two years later, Amazon is closer to being a trillion-dollar company than it is to file for bankrupt. Who would blame the analyst? Investing is hard.
On August 5th 2015, shares of Valeant Pharmaceuticals hit an all-time high of $262 per share and the company’s valuation topped $85 billion. At the helm was one well respected ex-McKinsey Partner whom people seemed to believe walked on water. I’m sure someone that day bought shares into the company believing they were buying a great business that could be held for the long-term. Two years later, thee shares were down 97% to $8.60/share. Investing is hard.
I won’t even talk about Steinhoff!
So where does this leave us? Well, with three interesting observations:
- Cognitive biases: People tend to overestimate their own abilities and the value of the information they supposedly have;
- Whilst these cognitive biases make us dynamic and responsive to a lot of situations in life, they unfortunately make us sitting ducks when it comes to investing; and therefore
- The most effective investing strategies are often the most boring ones: Continuously invest in low cost, broad based passive index funds and do nothing.
Reflection number 2: Do what makes you sleep better at night
There are no shortage of opinions and advise when it comes to investing. We have dedicated preachers of passive investments, disciples of active stock picking, value and growth investors, smart and dumb beta investors etc. Some debates are even super emotional: local vs offshore investing, buying vs. renting a house or paying off debt vs. investing, just to name a few. With all the plethora of advice/views/opinions, no wonder why most people simply get overwhelmed.
To help me navigate this mess, I have developed my own guiding framework when it comes to investing and/or managing my finances. It’s called “Do what makes you sleep better at night”. Every person know themselves, their appetite for risk and their psychological and emotional makeup. Therefore, simply manage your money in a way that makes them sleep better at night.
Reflection number 3: Guard against home bias
Many investors and their financial advisors are prone to home bias; the behavioural bias in which they systematically overweight their investments/wealth in local assets (stocks, bonds and property) whilst underweight in assets from everywhere else in the world. Whilst there are many drivers for this bias, psychologists believe the main driver is the strong innate desire for people to remain within their comfort zone and not take the path less travelled by.
The biggest downside of home bias is that it exposes investors to very high concentration risks and home events, political or otherwise, that tend to affect local assets in a similar fashion. When this goes to extreme, like what happened in Zimbabwe and recently in Venezuela, people’s life savings will be wiped away and they will end up with nothing.
Diversification is the “only free lunch” when it comes to investing and offshore assets should form a core part of every investor’s long-term financial plan. However, the decision to go offshore shouldn’t be a knee-jerk reaction to either a weakening Rand or scaring economic/political news headlines. Rather, it should be a well thought out process that is directly informed by your individual goals. Decide how much of your portfolio you want invested offshore and rump up your exposure consistently over time until you get there. Don’t let anyone prescribe to you how much you should diversify offshore: go with makes you sleep better at night!
Reflection number 4: Knowledge, just like money, compounds over time
The beautiful thing about writing is that it creates a positive feedback loop. In other words, writing is probably the best mechanism for you to learn more about a particular subject. The feedback, comments and questions I have received from readers have simply enabled me to learn new things, new ideas and get a better understanding of the global investment landscape. Think about it as getting schooled, Ivy League standard, but for free.
As such, it’s not just money that compounds – knowledge, relationships, physical health, personal networks, evolution / innovation all follow the same rule. For all of us, the most difficult part is getting to the escape velocity, that point at which the compounding effects really start to kick in.
I will therefore leave with this table below which I love so much as it gives perspective to the relationship between time and returns. Many aspects of life can be explained by this simple concept.
That’s it folks! Happy one-year anniversary to me. I would also want to take this opportunity to thank everyone that has supported me along this journey. I’m also opening up the platform to anyone who is interested in posting anything investment related. You can reach out to me on firstname.lastname@example.org
Till next time, happy investing