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What it takes to invest with the best

8 May 2019

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

It took JK Rowling 7 years to publish her first Harry Potter book, JRR Tolkien 17 years to write Lord of the Rings, and Charles Darwin over 20 years to print his theory On the Origin of Species.

Success takes time, self-doubt and courage.

As Amazon founder and CEO Jeff Bezos put it, “Invention requires a long-term willingness to be misunderstood. You do something that you genuinely believe in, that you have conviction about, but for a long period of time, well-meaning people may criticize that effort.”

Charles Darwin was called “the most dangerous man in England” when his work finally became public, and JK Rowling’s first few chapters of Harry Potter kept being rejected until a publisher’s eight-year-old daughter picked it up.

Investing’s no different

Building wealth takes time, and to be successful, you need to work through the pain it throws at you.

If things have gone well in the past, this can lull you into a false sense of security about the future. It’s important to remind yourself no matter what happened yesterday, there’s only one certainty about tomorrow – you don’t know what will happen.

This article isn’t personal advice and all investments can fall in value as well as rise, so you could get back less than you invest. If you’re not sure if an investment is right for you, please seek advice.

A lesson from history

Warren Buffett is arguably one of the best investors in history. From 1964 to the end of 2018 he turned a $100 investment into $2.48 million. That’s $2.46 million more than the US stock market made during the same period.

But these extraordinary numbers hide an uncomfortable truth.

A tiny minority of people, maybe just Buffett himself, actually earned this astonishing return. Not because it wasn’t feasible, but because it would have taken a huge amount of will power to stop yourself from selling along the way.

Take the first decade. If you’d invested $100 in Warren Buffett’s company, Berkshire Hathaway, in 1964, this is what your account would have looked like at the end of every year up until 1974.

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Berkshire Hathaway.

After 10 years, your investment had tripled. But just a year earlier, it was worth twice as much. Between 1973 and 1974 you’d lost half your money. Your account was smaller than it had been five years ago.

We’re programmed to survive, not invest

Studies show this is how our minds work. We think about money, not in terms of what we have now, but in terms of what we thought we’d have.

After years of fantastic growth, to lose 50% in a year would have been painful. To look back and realise it’s been five years of back-pedalling would have probably had you asking what’s going on.

Had it just been luck? Has Buffett lost it? Should I get out now?

In evolutionary terms, as Darwin pointed out, this mindset makes sense. Any organism that treats threats more urgently than opportunities stands a better chance of surviving. You don’t go fishing if you think there’s a crocodile in the water.

It can be a bit different with investing though, because opportunities can be mistaken for danger. If you’d sold your investment in Berkshire Hathaway, worried you might lose more, you’d have watched the investment you used to own accelerate into the distance.

Five years on, Berkshire Hathaway was worth eight times more than what you’d have sold it for.

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Berkshire Hathaway.

Keeping conviction

I’d say the rest is history, but it’s not that straightforward. From 1979 to the end of last year, Warren Buffett’s Berkshire Hathaway fell more than 30% on six different occasions. And each fall would have felt worse than the last because you had more money at stake.

The third time, for example, was in early 2000 when Berkshire lost 44%. At the turn of the year, your hypothetical 1964 investment of $100 was worth $453,031. A few months later, it was nearly half that. And in this particular case, the stock market was up at the time so not only had you lost over $200,000, most investors in other stocks had made money.

The press started to ask questions. CNN money wrote “it’s tempting to wonder: has the world’s most famous investor lost his Midas touch?” They went on to question whether his style was too old-fashioned to prosper in the high-tech times of the day.

After holding on for 35 years, this might have been the final straw. If it was, you’d have made a fabulous amount of money, but life on the side-lines isn’t much easier. Buffett’s approach was proven right, Berkshire Hathaway rebounded, the stock market tanked, and he was elevated to an even higher status. In hindsight, you could have earned an extra $2 million if you’d stayed invested through to the end of 2018.

Tips for the future

Theodore Roosevelt summed up our task, “Nothing in the world is worth having or worth doing unless it means effort, pain, and difficulty.” Persistence is the only road to riches.

The Buffett analogy brings to life the challenge of investing with the best fund managers. Even if you find one, sticking with them through thick and thin takes an iron will.

To echo Bezos, they’re guaranteed to look foolish because they’re trying to beat a market, which by definition represents the consensus. To be better, they have to be different, so their opinions will stand out from the crowd. When they’re right, they’ll be lauded, when they’re wrong, they’ll be laughed at.

Your job as a patient investor is to expect these mood changes and accept you won’t ever know if they’re right or wrong at the time.

Our suggestion to try and win the battle – invest with experienced managers. This gives you more information to work off, and more conviction when people start to criticise their investments.

And diversify, this is the only freebie you get as an investor. The next top performer probably won’t be the one you expect. Make sure you think about investing in different managers, with different styles, working in different areas of the world. If you’re comfortable with your portfolio, you should probably think about diversifying.

Finally, pack your survival kit.


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    Investment notes
    No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
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