I made my first investment on January 1, 1996, at the time I was 10-years-old. Not your standard primary school hobby. I was sport obsessed and starting to realise girls weren’t as annoying as I thought, but my inner finance geek was fascinated by what made share prices go up and down.
My parents didn’t work in finance but my dad had some shares in his self managed super and decided to teach me and my brother some of the basics. He let us choose a stock from the newspaper, gave us $1,000 (which later, to my dismay, I found out was only theoretical). I had a few stockmarket wins, a few losses and I was hooked!
I kept a diary of every investment I made between 1996 and 1999 which I still have today. It looks more like a colouring-in book than a trading diary because I gave each stock a different set of colours – but in it I kept track of my running profit or loss, dividends and company news cutouts.
This was the first share I ever bought, Savage Resources in 1996. I owned it for 5 months before selling for a 22.8% profit according to my diary.
Armed with a taste for trading, I entered the ASX Schools Share Game each year between 1999 and 2003. I won it three times up against 40,000 students from around Australia. The game lasts eight weeks, the trick is to pick volatile stocks and trade them aggressively – this isn’t investing, it’s speculation.
Naturally I decided to study accounting and finance at UNSW. I then had the fortune of spending time at a successful hedge fund and then scored my dream job at UBS managing the bank’s investment portfolio.
During my time there I’d seen how retail and media was being dismantled by innovative tech firms. I decided to do the same to wealth management, a seriously traditional and outdated industry. In 2013 I decided launch my own investment firm – Stockspot which aims to help anyone invest.
I’ve learnt many valuable lessons in my 20 years of investing in stocks. Here are the ones with the biggest impact on how I look at markets and investing now.
The best lesson is losing
Like losing in love, the best investment lessons I’ve learned happened when I’ve lost. Fortunately over 20 years I’ve had my fair share of ugly investments to learn from!
Plenty of investors will gloat about their wins. Fewer will talk about their losses and what they learned from them.
Make that the first question you ask anyone pitching to manage your money: “When have you lost money investing and what have you learned?”
Losing in the tech bubble. Investment hype = approach with extreme caution
Bubbles are a great opportunity to make money, but for most they become a very easy way to give it away.
I started investing during the first internet bubble so this was a lesson I learned early in my career. I was holding several speculative shares that had transformed into internet businesses. Then the tech bubble burst in March 2000 and their share prices crumbled. One of them was eMitch (EMI) an online advertising business which crashed from over $3 to under 3c in a year.
It taught me not to chase the sector de jour – regardless of your long-term view. I was convinced online advertising was going to be hot… but my timing was terrible.
eMitch (renamed Mitchell Communications) eventually recovered to $1.50 by 2007 but I’d long cut and run. The people who made from eMitch were those who saw an opportunity when the tech bubble crashed in 2001-2002 – not the ones who (like me) bought when the sector was most hyped in 1999.
Suffering from the Dunning-Kruger Effect
(You’re not as skilled as you think you are)
When one of my early investments, Ashton Diamonds, was taken over for 4 times my purchase price in 2000, I wrongly assumed this was due to my superior stock picking ability – rather than luck.
What really happened was I was suffering from the Dunning-Kruger Effect – the name given to an illusory superiority in which unskilled people mistakenly rate their ability much higher than average.
Years later I learned that many of the wins I had in my early years were entirely due to luck. As a 15-year-old kid I had no advantage or edge over the market to know which stocks were going to go up or down. Many first time investors fall for the same costly illusion.
Buy straw hats in winter
Skew probability in your favour by looking where others aren’t. People find this hard to do because it’s counter-intuitive – there’s comfort in chasing momentum and investing in what has done well rather than going against the crowd.
This is a core philosophy of my business Stockspot. When assets do well, we lighten them in our client portfolios and tip the funds into assets which have done poorly. We do this because returns tend to revert to their long term averages over time. Trimming good performers and buying laggards is a sensible strategy. Research by Vanguard shows that over time this is a proven way to reduce risk.
Dollar-cost average. Dollar-cost average. Dollar-cost average
Markets can go up and down over the short-term and it’s almost impossible to pick the top or bottom.
Instead of trying to time your entry point, dollar-cost averaging is the best strategy I’ve found to invest gradually over a few days, weeks or months. Investing regularly over time helps reduce the impact of short term moves in the market because you invest at an ‘average’ price over a period of time.
It can help fight the temptation to stop investing when markets fall… which we naturally do to try and avoid risk. Falling markets are the best time to be buying and by dollar cost averaging you can take advantage when others are panicking.
Smart marketing and smart investing – there’s a difference
It’s easier to sell shiny new financial products rather than give clients what’s actually good for them. Fund managers and research providers are constantly churning out new products and research to suit the flavour of the month.
This is why the investment advice industry is broken in Australia – most people making recommendations (advisers) have relationships with products via commissions, brokerage or stamping arrangements which creates an incentive to sell rather than to give good advice.
Costs are your investment enemy
The lower the fee you pay to the seller of investment services the more money left over for you. Every dollar you pay in commissions, funds management fees, adviser fees, subscription fees or brokerage come directly out of your returns.
Paying 2.5% in costs each year will mean that 75% of your potential returns are paid to the funds industry over your lifetime!
The best advice is boring
Finally, the most important secret I’ve learned about long term investing.
Market experts on TV and in the papers really have no idea what’s going to happen today, tomorrow or in a year’s time, which is why most years the school student beats the analysts, economists and expert stock pickers in guessing where the market is going this year.
Look at these 2013 market predictions; some of these experts were wrong by over 20%:
People who listen to market experts either have very short memories, or they just love to hear a good yarn.
In any case, the best investment advice rarely gets onto the news because it’s boring and makes it hard for most people in the finance industry to justify their jobs selling new stuff.
That advice is, invest in a broad mix of investments, don’t pick individual stocks, keep your costs low, rebalance occasionally and don’t stress about what happens in the short term because it’s all just noise.
Chris Brycki is the founder of Stockspot.