10 lessons learned from 10 years of investing in Australia
This week we’re celebrating 10 years of helping Australians to start investing - but we’re giving the gifts! Specifically, we'd like to share the lessons we've learned for creating wealth through investments in ASX shares.
What a run it’s been. Successfully picking stocks to invest in is about being two steps ahead, not just at the stock specific level, but also at the macro level. This is emphasised in the 10 Lessons for managing your share portfolio, from our PM the Idle Speculator. It’s also a factor in our 10 best investment picks over 10 years.
One of the tenets of our investment philosophy is to start investing in shares that have the potential over more than a year to achieve outsize performance.
For example, our stock of the week, LaserBond (LBL) has been upgraded to a Best Buy investment - because its fundamentals look good and it’s not expensive. Lying behind this, however, is that it’s technology assists manufacturers, a rapidly expanding investment class as countries invest in manufacturing capability due to stretched supply chains, increased tariffs, and the desire to divest from the greatest ever manufacturing hub, China.
Speaking of which, the Idle Speculator has been keeping his eye on Evergrande for some time and thinks that some trade opportunities are coming our way.
After he discusses in detail how many stocks you should own, the importance of buying cheap and being patient, a key takeout is taking advantage of fear. To paraphrase Jeff Bezos, “other people’s panic is your opportunity!”
Going through 10 of the biggest investment winners Under the Radar Report has generated in the past 10 years highlights how often those stocks didn’t perform well initially. But over time, our investment thesis played out and in multiple occasions delivered a 10 bagger performance for the subscribers who took our advice.
When we started 10 years ago our key insight was in the power of Small Caps to provide outsize returns, and the financial power of the retail investor.
Our speciality in investment picking is tailor made for a sector where there are perennially new opportunities, driven by entrepreneurs not only in Australia, but around the world. Disruption and the future is what you are buying and we love bringing that world to you.
The Under the Radar Report Portfolio is a couple of months younger than the newsletter. When we commenced back in November 2011, we were demonstrating how Small Caps could fit into a balanced wealth-creation portfolio.
Subsequently we transitioned to Small Cap only, which we are pleased to say resulted in improved returns, with not much extra risk.
1. Investment DIVERSIFICATION: OWNING 15 STOCKS
Diversifying away from single stock speculation is part of the process of broadening your investment experience. A friend, whose first investment was a 30-bagger over 8 years, has not broadened his investments beyond similar companies guided by the same set of key directors who have served him so well.
In contrast, The Idle Speculator’s SMSF has invested in over 100 Australian listed stocks over 20 years, and now retains six holdings. Four of these are covered by Under the Radar Report, Austal (ASB), Tuas (TUA), NZME (NZM), and the soon to be taken over Wameja (WJA).
In our friend’s case, diversification would be di-worse-ification. Lucky him. But as Beers with Rich points out, although it is possible or even likely that one or two stocks go badly wrong or very right, the majority of stock specific risk will be evened out once a portfolio reaches seven stocks, assuming reasonably balanced position sizes. This still makes for a volatile portfolio, but one that was unlikely to be totally destroyed by poor individual stock picking or bad luck, unless of course the stocks are highly correlated with each other, all biotech and lithium, say.
At the other end of the scale, many portfolios may hold a range more than 50 individual stocks. Even then, the portfolios may not be particularly diversified, often overweighted to Australian financials. We think that a portfolio of more than 20 stocks is largely unmanageable, and that less than 7 to 10 leaves you open to a degree of stock specific risk which is not for everyone.
Owning 15 stocks at any one time seems to us an emotionally diversified investment portfolio.
2. BUY AND LEARN – INVESTMENT IS A PROCESS NOT AN ACTION
One of our key mantras is that subscribers should spend money on cheap assets, and then be patient. We specialise in recommending stocks that have the potential over more than a year to achieve outsize performance.
We often eschew momentum trades because risks can be too high when it inevitably turns the other way. We may miss fast moving stocks on their first run. But our approach of circling back, gives thousands of subscribers an opportunity to start investing in stocks of good to great companies at reasonable prices.
Being patient also applies to trading. One thought experiment to pose when making an investment, is:
If you knew that the stock price would be substantially down tomorrow, would it make you excited for the opportunity to buy more, or would it make you wonder what it was that the market knew that could cause such a dramatic change in apparent value?
Smart investors trade stocks cautiously, bit by bit, just tucking a few shares away here and there as the mood and our liquidity and the market allows.
If your your entire investing position is on the basis of a single supposition or a particular fact, you have nowhere to go if your prescience is not being rewarded or this news becomes less important. You have done your dough and left either holding onto investments in a story that no longer has the attributes that you imagined, or you can sell out, possibly realise a loss, and move on to your next great idea, your fingers only slightly burned perhaps.
We usually like to acquire only a small position initially, on the basis of one piece of interesting news, or one startlingly exciting insight. But a company is (hopefully) a dynamic institution, in a changing marketplace, there are many things going on behind the scenes which either undermine or support your investment thesis.
Buy ASX Equities Cheap, Then Be Patient.
3. REVIEW NOW AND TAKE ACTION! YOUR BIGGEST HOLDINGS WILL DETERMINE YOUR FORTUNE
Our advice is to ensure your largest positions are those that are the easiest to live with.
If your largest position is in a speculative company yet to make profits, this often defines your portfolio. A company growing revenue at 50% or more per annum may eventually grow into almost any valuation, but it is also possible that perceived advantages in the markets are competed away before shareholders realise the profits that they have been investing for.
Take action. Too many investors do nothing instead of taking corrective action after doing a review.
In mid-to-late 2007, The Idle Speculator’s portfolio was 15 stocks, of which less than a quarter were income producing. While it can be many years off, the whole purpose of an SMSF is to pay income in retirement. In this case, too much was invested in a stock that had performed very well, and had made him a lot of money more than once.
He sold the final two tranches of 75% of his position in Mikoh (ASX:MIK) at 79 cents on 31 October 2007. The shares sold for $73,000 would now be worth around $300.
Under the Radar’s Small Cap Portfolio will tend to avoid situations like this in the first place.
Companies with no revenue and no income are all very nice and good until financial conditions deteriorate.
At that point, there is very little interest in funding a losing business indefinitely.
Our advice to subscribers is that NOW is a good time to review your own holdings to ensure that your current exposure to companies without revenue profits or dividends is limited to money that you can actually afford to lose.
While you might convince yourself that these are investments, they are not. They are speculations, which can go wrong quickly.
Review your investment portfolio today and take action
4. BAD STOCK MARKET = GOOD OPPORTUNITY FOR PATIENT INVESTORS
Although it paid very well to be a momentum follower in the last few years, it left you high and dry when Covid hit in early 2020. Fundamental investors should be able to make decisions about which stocks were keepers.
We sold the stocks we thought faced extended Covid challenges, Village Roadshow (VRL) and Ingenia Communities (INA), as quick as we could in early March 2020.
Eventually INA's price came back, but VRL never did before it was taken over for cash at the end of 2020.
A key advantage of being a private investor is that you do not have to justify your decisions to an investment committee. Private investing is a lone wolf game, where patience is rewarded more often than not with increased capital.
5. BEWARE OF FOMO
We advocate diversification of investments and having a number of investment irons in different asx fires, and not paying too much for any of them. It is never a good reason to buy a stock because it is described as the next anything, the next Amazon for example.
Fear Of Missing Out is not an investment thesis.
6. HIDDEN VALUE TAKES MANY FORMS.
Our job is to find Australian stocks where the market believes the business is ex-growth, but we are willing to take a patient approach while management work out a way to return to growth. Often, the market will not value the same prospect hidden within an older company as highly as if it is presented as a shiny brand-new IPO or start up.
Individual investors can afford to trade in companies that the market doesn't like at the moment, and wait until it works out what has been under its nose all the time.
7. BUILDING A BALANCED PORTFOLIO - INCOME AND GROWTH
Building a balanced portfolio, rather than taking a few bets on individual shares, involves covering as many bases as possible.
Some stocks are good for a quick fling, but a portfolio is for keeps.
Some stocks will be expected to pay a franked dividend. Portfolios have to pay costs, and taxes, and ultimately deliver value to the beneficiary. Only the rich have the luxury of investing for growth forever. Having regular income from your assets is both comforting and rational. It usually means you own shares in profitable companies which have a positive financial position.
Other ways to balance a portfolio include having some growth and some cyclical stocks, stocks with only domestic exposure or international revenue and costs, or exposure to government, industrial, commercial, distribution and consumer sectors.
With smaller companies it is preferable in general terms that they have strong balance sheets, since the financial sector is not always helpful when the need arises, but there are times when a heavily geared balance sheet makes for a more interesting investment.
One example was Seven West Media (SWM) through the first part of 2020 when its debt looked as though it was liable to crush the company, only for a turnaround to deliver a 6-7 bagger for the stock after we picked it in April and May 2020.
Having regular income into a portfolio is both comforting and rational.
8. TAKING LOSSES – AVOID THE BIG ONES
While it is always uncomfortable talking about losing money on on investments, and every investor would rather talk about their wins, losses teach the best lessons.
One stock we invested in early on, WDS, turned out to have a very suspect business model, we sold within 3 months, and the company went into administration a year or so later. We had not invested too much.
Critically, we have not lost a single investment to the administrator in the last 10 years. That may not be such an achievement in a huge bull market, but in the first five years of the Radar Report, the Small Caps and Emerging indexes performed poorly.
Do not invest too much money in any one company.
9. KEEP A TRACK OF YOUR PORTFOLIO.
Lord Alan Sugar says, "buy low, sell high, keep good records." If we can run a portfolio on the same basis, we think we have a chance.
Keeping good records is a critical part of maintaining portfolio integrity. Not only to deal with taxes, but to learn lessons better.
Rather than dwell on what we missed, we have always said that stocks are like London buses, there is always another one around the corner.
The positive spin is that we created good chances to score a winner, even if we haven’t managed to bury it in the back of the net just yet.
There is always another winner around the corner. Do not get too attached to any one position.
10. FINAL, FINAL THOUGHT: EXPECT THE UNEXPECTED
This one is self explanatory after Covid. Future unknown unknowns are currently unknown too. But the core advice remains, don't get overly attached to one investment, and be ready to exit if you feel unsure about the investment.
Expect the Unexpected
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