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The 7 truths of my basic investment philosophy

By Sam Instone - August 03, 2022

Simple, but not easy.

Our wish is for our clients to own a broadly-diversified, low-cost portfolio of global assets, frequently rebalanced, academically ‘tilted’ and for them to stay informed enough to leave this alone until their financial goals are realised.

These are some thoughts that help us arrive at this investment philosophy:

1. Stock picking is exceptionally difficult

Academic evidence demonstrates that most stock pickers underperform the indices after a few years.

After 10 years net of fees, there are practically zero outperformers.

And that’s just buying…

Selling the right thing at the right time is even harder.

People are terrible at it.

We know the names of people like Warren Buffet and Peter Lynch not because they’re typical stock pickers, but because they’re anomalies.

Play the percentages.


2. Market timing is even harder

The human brain likes to find patterns to bring sense to things.

Randomness doesn’t suit us.

We don’t like to think that what happens to us tomorrow will be entirely random.

Instead, we like to think we’ve got control over our lives.

This is an issue when it comes to investing.

We think we can identify patterns in past share prices and see market movements before they happen.

“If I buy here…if I bought here last time…I’d have made X amount, so why don’t I do the same thing this time with the same picture... I’ll be rich!”

Trying to ‘call the bottom’ only means that you need to find a way to ‘call the top’.

It’s nearly impossible to accurately and consistently identify the best selling and buying positions in the market.

Long-term investing is where the actual returns get compounded.

3. We’re oblivious to our own cognitive shortcomings

Most drivers believe they’re above-average at driving.

Equally, most investors believe they’re above-average at investing.

We’re over-confident and generally have a higher opinion of ourselves than we perhaps deserve.

We think we can consistently beat the market and forecast the future.

Unfortunately, we can’t distinguish between outcomes that are the result of luck or skill.

Our cognitive bias is extremely difficult to see and can be highly damaging.


4. Behaviour is the biggest determiner of investor returns

Do you chase the hot stocks?

Or blindly follow celebrity fund managers during bull runs?

Do you panic and sell during volatility?

How investors behave is more impactful on their long-term returns, far greater than stock picking or market timing.

Behaviour has two parts.

The first is knowing that behavioural biases exist and can be a driving force in markets.

The second part is knowing that you’re just as susceptible to these biases as everyone else.


5. Consistent average returns turn into above-average returns over time

Investment managers who finish in the top 10% in any given year underperform over the long haul.

It’s been proven time and time again.

Their focus tends to be narrow and specific, and their sector, style and region go in and out of favour.

Jumping between the top and bottom deciles is not a formula for successful long-term performance.

Instead, consistently achieving a modest return will compound and eventually result in top quartile returns (or better).


6. Fees matter more than you think

We’re used to paying more for better products or services.

But, with investing, the less you pay, the more you get to keep for yourself.

There’s no doubt that higher fees are a restraint on long-term performance.

The right financial planners can substantially reduce the fees you likely pay.

Most people lack the inside or technical knowledge to achieve exponential growth with their own investment portfolio.

A trusted adviser can help you figure out your goals, whilst presenting different ways of forming portfolios to ensure you understand the possible distribution outcomes.

This way, you can make informed investment decisions.

Your adviser will have oversight of what’s happening, and together you can revise your investment plan as necessary.


7. Always be optimistic about the market

When markets reach record highs, we believe that they’re working as they should with the outcome we expect.

This makes intuitive sense.

If stocks didn’t have a positive expected return, no one would invest in them.

This is why I’m always optimistic about the power of markets.

And why I’d rather bet with them, than against them.

Markets represent people coming together.

We can’t predict the nature or timing of a crisis…

But we can bank on human ingenuity to find a path through it.

Markets are forward-looking and reflect this optimism.

An optimism I believe is innate to humanity.

Your optimism only increases when you begin to understand how markets really work.

How we deal with uncertainty is the core challenge of human existence.

Yet we never have all the information we want.

So rather than having to guess what will happen to whom and when I choose to invest in the market.

I wake up early every morning believing the market will go up a little.

But I’m prepared if it drops.

And you should too.

Markets will go up and down.

But expect them to be positive as this is what history has shown.

Save and invest for a better life, book a call - SAM