Unless you’re extremely lucky, you won’t get rich quickly by investing. You need to be prepared to take a long-term view and recognise that the compounding of returns, described by Einstein as the eighth wonder of the world, is what generates real wealth.
For example, if you invest £1,000 at age 18 and your investment grows by 10% per year, you’ll have £142,000 by the time you’re 70. By comparison, if you leave the money in the bank earning 2% per year, you’ll only have £2,800.
I recognise, however, that this approach requires a huge amount of patience. Good investing, as Paul Samuelson once said, should be like watching paint dry rather than a trip to Las Vegas. Patience, however, is in understandably short supply when first-time investors are making 15 times their money in three weeks by investing in GameStop.
I’ve learned a lot of lessons about investing over the last 21 years and thought that now was a good time to share some of them.
Lesson #1: Don’t mistake luck for skill
Before Octopus, I worked as a graduate trainee at one of Europe’s largest fund management companies – Mercury Asset Management. The personal dealing rules were suitably strict and any trade you wanted to place had to be signed off (in person) by one of the Managing Directors.
I’d made the decision to leave Mercury in January 2000, but I didn’t leave until the end of February. So, I decided to use these two months to see if I could turn my £5,000 of savings into something that would help get Octopus off the ground. I remember, one Monday, investing £4,000 in a US business called Netbank. To give you some perspective, January 2000 was the height of dotcom mania and retail investors were buying anything and everything with a digital strategy. By Thursday I’d made six times my money. I was on a training course at the time (away from the office) so I feigned a stomach illness so I could get one of the Managing Directors to sign off my sell order.
This remains my luckiest investment. Lucky because I fundamentally didn’t understand the business (you should never invest in something you don’t understand) and my timing, by chance, happened to be perfect (the shares fell by more than 80% over the following two months).
Lesson #2: Look where no one else is looking
There’s a really good question all investors should ask themselves. “How do you make money out of equities?”
The answer is simple – you have to know something the market doesn’t know. When you realise this, you will very quickly stop researching large companies. These companies are typically covered by dozens of analysts so even if you spent years doing your research, you’d probably never uncover anything that the market doesn’t already know.
Researching small, quoted companies is very different. More often than not, these companies are only covered by one or two research analysts. So, if you spend a week or two putting in some dedicated research, there’s a chance you’ll find something the market may have missed.
Lesson #3: Don’t try and call the market
Whatever you do, don’t make investment decisions based off any kind of macroeconomic view. As the famous economist, Galbraith, once said “the only point of economic forecasting is to make astrology look respectable.”
However hard I try; I find it impossible to predict macroeconomic trends. There are too many moving parts, all susceptible to changes in sentiment or government policy. Always stick to fundamental, bottom-up company research and recognise that over any long-term holding period there will be economic bumps along the way.
Lesson #4: Invest rather than trade
Jason Zweig summed up the problem brilliantly when he wrote “I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.”
The costs associated with constantly trading your portfolio destroy returns. Far better to find great companies and then hold their shares for a very long time (decades not years). This does, however, require a mindset few investors seem to have.
In fact, an investor’s main problem, and even his worst enemy, is likely to be himself. Most people simply can’t help reacting to what’s going on around them. They start to behave like they’re part of a herd and get swept along by the same waves of fear and greed as those around them. They lose perspective, panic or become greedy.
The best investors are relatively dispassionate and fiercely logical. They’re also not driven by their ego. They understand that there will be times when their investment case will change, or they’ll simply be wrong. When this happens, they’ll take their medicine and move on. They won’t worry about any embarrassment and they definitely won’t wait for the share price to recover (it rarely does).
Lesson #5: It’s always about the people
I can trace the reason behind my best – and worst – investments back to people. There have been times when I’ve been blinded by the supposed market opportunity rather than assessing the quality of the team in front of me. This has always ended badly.
There are three things I look for in the people I back.
First, these people must be ‘good’ people. By this I mean that they must instinctively do the right thing, even when no one is watching. Secondly, they must be prepared to work exceedingly hard and to make the sacrifices that are required to scale a business. Third, their own incentives must be aligned with mine (ideally, they’d be significant shareholders in the business they’re running). Owners behave differently.
Lesson #6: Invest in companies you’d want to be friends with
The problem with most companies is that they’ve spent the last few decades measuring their success through a single lens. Profit. They’ve sacrificed the interests of others (their employees, their customers, their communities and the environment) for their own financial benefit. I don’t think these companies will do very well going forward. I think the world has changed – people now want to work for, buy from and invest with ‘good’ companies.
In my view, these ‘good’ companies, which understand what it means to make the world a better place, will deliver enormous financial returns for their investors over the coming decades. As well as solving some of the biggest problems facing society today, these ‘good’ companies will understand that how they behave is just as important as what they do. They’ll be companies you’d want to be friends with.
Lesson #7: Financial planning is everything
The final point I’d make in all of this is that how you invest your money is more important than where you invest it. ‘How you invest’ is all about financial planning. It’s about ensuring that you’re using all the tax wrappers at your disposal (as well as minimising your mortgage and other costs). Getting this right will have the biggest impact on your financial security.
This is the real problem we face as a society. 21 million people in the UK want – but don’t currently receive – financial coaching. In my view, employers need to help solve this problem. They need to take more responsibility for the financial wellbeing of their employees.
And the solutions on offer need to evolve. Robo-advice, so often touted as the answer, is anything but. It’s solving the wrong problem. People don’t need an automated investment solution. They need a financial coach. Someone who can help them understand what they should be doing. Someone who is on their side, removing complexity and ensuring that they, and their family, can live the life they want.