Recently, I appeared on Morningstar’s Investing Compass podcast and I was asked by host, Mark Lamonica, about how I invest now compared to when I was a fund manager. I was on the podcast to talk about ASX stocks to buy and hold forever, so this question towards the end of the interview threw me somewhat, and I’m not sure I answered it well. Here’s my attempt to rectify that and give more detail on the topic.
The key differences
The key differences between how I invest today versus when I was a fund manager include:
1. I invest with a longer-term horizon than I did as a fund manager. As an individual investor, I feel like I can afford to take a long-term perspective on investments, and my time horizon these days is 10+ years. As a fund manager, I never had the same luxury. I had clients who often demanded short or medium-term results, and that created pressure to find investments that would pay off over that time horizon.
2. Because I think longer term as an individual investor, I focus more on the quality and moats of businesses. The longer the time horizon, the greater the need to concentrate on business quality. That a company has an edge to keep competitors at bay. That it has a long runway to grow their businesses. That it has a management capable of executing. And that it has a track record of delivering on promises.
3. Being long term oriented, I focus more on companies I own than those that I don’t own. I was once a Portfolio Manager for an Asia-ex Japan fund, and autos were one of the sectors that I covered. I didn’t invest in Hyundai Motors at the time, which had the largest weighting of any company in the auto sector. It outperformed the autos part of the index for 18 months and I remember having to justify why my fund should stay underweight Hyundai. As an individual investor, I don’t need to concern myself with things like this so much.
4. As an individual investor, I am not as spreadsheet focused as I was as a fund manager. Fund managers and analysts are obsessed with spreadsheets and models. As an individual investor, I rarely use a spreadsheet. It’s important to know the key earnings drivers for a company and what assumptions will drive earnings going forward. Though I prefer simplicity to complexity when it comes to earnings forecasts nowadays.
5. As an individual investor, I don’t have access to the same information as I did as a fund manager, and therefore rely more on primary sources. As a fund manager, I was bombarded with information from brokers, consultants, internal research, government research, and a million other sources. As an individual investor, I don’t get access to that same information. I rely much more on primary sources for information on companies, such as earnings releases, management presentations, and annual reports. This can be good as it filters out a lot of noise. The bad is that I don’t get to same opportunity to test my views against those of others.
6. As an individual investor, I don’t get access to company management like I did as a fund manager and therefore use other avenues to assess senior executives. As a fund manager, I often had access to senior executives at companies. As an individual investor, I barely get access to the receptionists! That can be good and bad. Meetings with management can be a mixed bag – sometimes there’s useful information but there can also be a whole lot of smoke. As an individual investor, I rely more on primary sources to assess management. What their track record is like. What they were like at previous companies. Whether they delivered on previous promises. Their vision and whether it’s achievable. Evidence of whether they have created a good culture ie. employee feedback.
7. As an individual investor, I embrace simplicity over complexity. Fund managers and analysts love complexity, and I was no different. As an individual investor, I prefer simplicity. For instance, I now prefer investing in a good business with decent prospects than a potential turnaround story. It’s simpler, consumes less time, and is usually more profitable over the long term.
A different example: China is dirt cheap at the moment, has just announced much-needed economic stimulus, and its market could bounce hard off depressed levels. But I also know that the government controls the country, that it isn’t interested in investors making money, and that China has a track record of poor shareholder returns despite spectacular economic growth. For me, China is in the too-hard basket and there are other, easier ways to make money.
The differences above point to some of the pros and cons of being an individual investor.
The pros include:
- Freedom to invest how you want. Obviously, being an individual investor is solo sport. Being a fund manager isn’t, and that has limitations.
- No teams/bosses to worry about. A corollary of the first point.
- No clients to worry about.
- Fewer short-term performance pressures.
The cons include:
- Reliance on yourself rather than a team. The good and bad is on you, not a team.
- Don’t inherit processes to guide investment decisions. Most investment teams have detailed processes to guide decisions. The mantra is, ‘good processes lead to good outcomes.’ Individual investors don’t inherit these processes and need to create their own process to help them achieve their goals.
- Don’t get the same access to information.
- Don’t get access to company management.
- Don’t get to influence company decision making.
- Don’t get the same access to company competitors, suppliers, and customers.
In sum, I love having fewer constraints as an individual investor. Yet, I also miss bouncing investment ideas off fund manager/analyst colleagues.
Investing, like life, always involves trade-offs…
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In my article this week, I compare the valuations of the four major asset classes - cash, bonds, stocks, and property - and point to what seems overvalued as well as where investors may be able to find a bargain.
James Gruber
Also in this week's edition...
Mark Lamonica looks at why dividend ETFs may disappoint income investors. He suggests the structure of many dividend ETFs leads to lacklustre or non-existent dividend growth. He runs through the different options for investors.
Martin Currie's Reece Birtles is downbeat on the outlook for the ASX. He says the recent reporting season delivered disappointing earnings guidance from companies, and that this may be a sign of a slowing economic environment. He also notes a concerning trend of companies hoarding retaining earnings and reducing their dividend payout ratios. He says this doesn't augur well for dividends in FY25.
The Coalition's persistent calls for first home buyers to be able to tap superannuation for housing purchases continues to get widespread publicity. Saul Eslake explains the reasons why it's a bad idea, including that it'll likely result in more expensive house prices.
Immigration remains a hot button issue in Australia given the skyrocketing house prices and cost of living. Peter Zeihan looks at how overseas countries such as Canada and Germany have handled the problem. He says while there are undoubted economic benefits to immigration, they need to be balanced against the social costs.
Mining companies are famous for destructive mergers and acquisitions and Schroders' Justin Halliwell says that BHP was lucky that its bid for Anglo American fell over. He runs through the numbers on why BHP's proposed deal would have been a bad one. He also goes through his latest views on lithium after the commodity's unprecedented recent collapse.
Kion Sapountzis has an intriguing theory on why the discounts on some listed investment companies (LICs) and listed investment trusts (LITs) are deepening and persistent. His data reveals LICs and LITs that exhibit lower volatility tend to trade closer to their net asset values. Conversely, those with more concentrated portfolios and higher volatility generally trade at steeper discounts.
Lastly, in this week's whitepaper, Man GLG, an affiliate of GSFM, outlines three reasons to be optimistic on Asian stocks.
Curated by James Gruber and Leisa Bell
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