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Five gems of wisdom. What are yours?

Thomas Huxley (19th century English biologist and key supporter of Charles Darwin) once famously said “try to learn something about everything and everything about something.”  His insight about the need to learn is a great introduction for this months’ Pathfinder commentary on gems of wisdom for investors and advisers.

Thursday, December 5th 2013, 9:19AM 8 Comments

by Pathfinder Asset Management

1. Don’t just accumulate assets

"Know what you own, and know why you own it."
Peter Lynch

From 1977 to 1990 Lynch ran a US$14 billion equity fund for Fidelity Investments averaging returns of 29% per annum.  Even into the 2000s he proved to be the most successful mutual fund manager ever.  He was a big believer that you should invest in what you know.  And when you own it, be very clear about why you own it.  Don’t just accumulate assets without questioning whether to sell – and don’t let an emotional attachment to an investment cloud your judgement.

2. History has a habit of repeating

"The four most dangerous words in investing are: 'this time it's different.'"
Sir John Templeton

Templeton was a pioneer of the mutual funds industry setting up the Templeton Growth Fund in 1954.  Its phenomenal performance led Money magazine in 1999 to call him "arguably the greatest global stock picker of the century."

Too often we have a habit of thinking things have changed.  In the 1990s investors were convinced that internet based companies didn’t need to make profits or pay dividends.  The new business plan was about cash burn not cash flow.  But things weren’t different – and the unprofitable companies inevitably folded. 

The “this time it’s different” statements are nothing new.  An all-time classic example comes from Irving Fisher the renowned US economist and statistician. While James Tobin and Milton Friedman called Fisher "the greatest economist the United States has ever produced" this did not save him from thinking things might be different in the bull market of 1929.  As the stock market surged he announced that the market had reached "a permanently high plateau" – within weeks the terrible collapse and Great Depression began. 

Sometimes we’d like to think things are different, invariably they’re not.  Too often investors repeat previous mistakes.

3. Those CPD credits may be worthwhile after all !

"An investment in knowledge pays the best interest."
Benjamin Franklin

Franklin was an outstanding scientist, inventor, politician and thinker.  Born into the Age of Enlightenment (18th century) he was clear that we should never stop learning.

As advisers or fund managers wanting to do the best job for our clients we need to stay current and keep learning.  The importance of knowledge in a fast changing world is summed up brilliantly by Alvin Toffler (US writer and futurist) who wrote “the illiterate of the future will not be the person who cannot read. It will be the person who does not know how to learn.”

4. Watch out for those black swan events…

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”
Donald Rumsfeld

Donald Rumsfeld (United States Secretary of Defence) was widely ridiculed for this statement in 2002.  It is, however, a succinct summary of different levels of risk awareness.   Rumsfeld was talking about weapons of mass destruction and concerns about Iraq – but he could equally have been talking about the risk of investing. 

From a risk perspective the “unknown unknowns” are the greatest danger.  These so called “fat tail” or “black swan” events are by definition almost impossible to plan for but drive some of the most significant changes in markets and society.

5. A selection wise advice from Warren Buffet

This legendary investor is full of sage advice – it is simply not possible to limit him to one quote.  So here is a small selection of Buffet gems:

“Be fearful when others are greedy. Be greedy when others are fearful."  The classic contrarian’s view! Buy as the market falls and everyone expects the end of the financial system.  Sell as the market is soaring and everyone unknowingly fuels an asset price bubble.  In the 1990s Buffet stayed well clear of the boom in internet stock prices – he looked like a dinosaur investor one minute – and a genius the next. At the peak of the GFC (2008-2010) he bravely took stakes in Goldmans, Burlington Northern (a railroad) and Swiss Re (insurance) for over US$40 billion – which subsequently reaped his investors huge rewards.

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”  This is very intuitive about forecasting – the outlook is too often a reflection of the individual’s bias.  For every forecast that gold is going to US$2,000 you can find a forecast saying it will slump below US$1,000.  For every forecast saying Chinese GDP will grow slower than the market expects you will find one saying growth will surprise on the upside.  Forecasting can be more art than science.  Investors have a habit of searching out forecasts that validate their own outlook and forecasters have a habit of giving an outlook that may suit their own bias.

Rule No. 1 : Never lose money. Rule No. 2 : Never forget Rule No. 1.”  Well that spells out a great strategy…. if only real world investing was that simple….. 

If you have a favourite financial markets quote please feel free to share it in the comments section below.

John Berry
Pathfinder Asset Management

 

Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors. www.pfam.co.nz

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Comments from our readers

On 5 December 2013 at 10:21 am R1 said:
"In God we trust; everyone else must bring data."

From recent experience I would add that you also need to ensure the data is robust and not found on only enough research to support the theory being promoted.
On 5 December 2013 at 12:39 pm brent sheather said:
"I wouldn't buy shares in any hedge fund I was able to get shares in" is a good one..applies equally to ipos.
On 5 December 2013 at 12:48 pm Richard James said:
During the same period the average investor in Lynch's Magellan fund earned 13.4% per annum, less than half the fund return and several percentage points below the index. Why? Because investors buy high and sell low. If we are to improve investor outcomes we need to focus our collective energies on the biggest cost of investing - investor behaviour.
On 5 December 2013 at 2:45 pm FFS said:
Sorry John but by definition a 'Black Swan Event' is impossible to watch out for or predict.

Otherwise good article
On 5 December 2013 at 4:49 pm traveller said:
"the time to buy is when blood is running in the streets". one of the Rothschilds I think
On 6 December 2013 at 7:45 am Independent observer said:
"You get what you pay for"
"Ignorance is bliss... until you go broke"
"He who shouts loudest is not always right.... He's just a good shouter"
"Queensland will always welcome those unable to make it in NZ"
On 6 December 2013 at 9:09 am Cathy said:
"Time in the market not timing the market" and "Every dog has its day" are two of my favourites. Nice article by the way.
On 10 December 2013 at 10:17 pm Andrew Nuttall said:
There are two types of forecasters.Those that don't know and those that don't know they don't know

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