Top 10 investment lessons

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.