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Top 10 investment lessons

Castle Point Chair, Amanda Smith, shares pivotal investing lessons garnered from her high profile and successful 26-year investment career.

Monday, December 14th 2020, 1:22PM

by Amanda Smith

Amanda Smith

Over a long career managing money, I collected a few scars on my back from investment mistakes. I wrote a list of lessons learned on a white board hanging by my desk, and emphatically brought it to my team’s attention if I thought my past mistakes were in danger of being repeated. Please consider these points to ponder, rather than recommendations.

1. Be careful with IPO’s
Investors can expect a Day 1 return from an IPO of 8-10%. The initial return can be much higher, but IPO’s can also turn out badly. Institutional investors must play an elaborate game with the organising brokers as they vie for their cut of a popular IPO but may have only a few weeks to get their heads around a new company or industry. In my experience, what happens in the following couple of years is much more important, when you find out what really makes the company tick.

2. Beware asset price bubbles
In my youth I met a now-famous Australian fund manager with a “value” bent, who told me, dourly, that I should never pay more than 20x earnings for a stock. That was just before the “tech wreck” of the early 2000’s and it was painful to discover he was right! A lot of money has been made recently in high growth and high P/E stocks, but with the median stock in the S&P/NZX50 index sitting at a forward P/E of 22.5x, it would be messy if it turns out he is still right.

3. Mergers & Acquisitions are often disappointing
M&A has a mixed track record, because, as anyone who owns a house will know, problems missed during due diligence will emerge later. It’s particularly risky if the target is as large as the acquirer. Acquisitions in an unrelated field can also be a red flag, as management may believe the core business is in decline, so the rationale for the acquisition is defensive.

4. Never buy listed property at a premium to NTA (Net Tangible Asset value)
This is a tricky one at the moment, because low bank deposit rates are driving investors to seek yield, and listed property dividends are attractive. Central banks actions are supportive of asset prices and may continue to be so for some time, but this one is on my list because property is cyclical, and the sector has spent plenty of time trading at a discount to NTA.

5. They all go bad in the end
This may sound cynical but is intended as a reminder that the conditions allowing a company to grow may come to an end. Unless the company adapts, earnings and share price performance will suffer.

6. The company builds a shiny new Head Office
I once took a colleague out to see TranzRail at their new head office at Smales Farm. He turned to me in the lobby and asked, “this is a very nice building, but where’s the railway?”. Decisions about new head offices often follow, rather than precede, a period of good company performance.

7. Management asks you why the share price is so high
This happened to me a couple of times and it didn’t turn out well.

8. Management asks you what they should be doing
A popular Australian CEO once asked me how they could grow their brand awareness in New Zealand. I thought this was something he should know. On another occasion the CEO of a small NZ tech company asked me what strategy move they should make next – I remember thinking “I don’t know and if you don’t know either we’re in trouble”. One of these companies ended up being taken over after a period of underperformance, and the other didn’t survive.

9. Company insiders sell
Management selling shares isn’t usually indicative of anything, especially in the age of continuous disclosure. However, I sometimes wonder whether they would be selling if they thought the share price was going up. Years ago, I spotted an insider sell over the Christmas break. I paid attention because the person was a company stalwart, and the sell was a reasonable size. It might have been coincidental, but it turned out the company’s best days were behind it.

10. Inappropriate jokes
This is not what you’re thinking! Sometimes casual comments can be revealing. I met with the CEO of a biotech company, and as he showed me out, he nudged me with his elbow and said, laughing, “I hope it works!”. It didn’t.

Disclaimer

The following commentaries represent only the opinions of the authors. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest. All material presented is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Castle Point may or may not have investments in any of the securities mentioned.

About Castle Point Funds Management Limited

Castle Point is a New Zealand boutique fund manager, established in 2013 by Richard Stubbs, Stephen Bennie, Jamie Young and Gordon Sims. Castle Point’s investment philosophy is focused on long-term opportunities and investor alignment. Castle Point is Zenith FundSource Boutique Manager and Australasian Equity Manager of the Year 2019.

About Amanda Smith

Amanda has more than 26 years of financial markets experience. Prior to joining The Treasury’s Commercial Operations Group in 2013, Amanda was Head of Equities for ANZ Investments in Auckland, which managed over $8bn in assets including $1.5bn in New Zealand and Australian equities.
Prior to ANZ Investments, Amanda was an investment manager at ANZ Funds Management in Wellington. She has also held roles as an equity dealer for Prudential Portfolio Managers, and research analyst at Doyle, Paterson, Brown and AMP Society.
Amanda holds a Bachelor of Arts (Economics) from Victoria University.

Tags: Castle Point Funds Management

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