While watching a documentary on wildebeest migrating, there was one scene where after days of traversing the African veld, the wildebeest arrive at the Mara river. As the herd starts drinking, a crocodile pops its head through the water no more than a metre directly in front of one wildebeest. There was no reaction – it simply carried on drinking.
“No wonder they get chomped – they’re stupid,” I said. Without lifting her head from her phone, my daughter (a vet) quietly commented, “Their eyes are on the side of their heads – they can’t see what’s immediately in front of them.”
Some things seem so obvious and simple that investors find them difficult to accept and apply. It’s almost as if the issues are too easy. Investors often focus more on what they can ‘see’ in their peripheral vision than on what’s immediately ahead. An apparently complicated problem must require a complicated solution.
Over the years of managing investments, I’ve have gained some insights which are basic, but effective.
- First, avoid bad decisions.
- There’s always profit to be made from panic.
- Think about the expected returns, not past returns.
- When perceived risk is low, actual risk is high. When perceived risk is high, actual risk is low.
- In times of major crisis, the worst asset to hold is cash.
- Focus on the income, not the price.
- If you want to make your life easier, only look at returns of five years or longer.
- Just because you got away with it doesn’t mean you didn’t take risk.
- Risk is often under-priced.
- No investor gets it right all the time.
- There is no signal to tell when the market is about to turn – be prepared to appear ‘wrong’ for a long time if necessary.
- Investors who manage their own portfolios never measure their performance against the market.
- When all else seems to fail, trust capitalism and optimism.
- Investors worry unnecessarily about geopolitical events, but those events only count when an economy is already unstable.
- Don’t worry about costs – focus on what you get to keep after costs.
- Beliefs drive outcomes more than strategies.
- Forecasts should be for direction, not detail.
- Successful investors don’t look for the ‘holy grail’.
As obvious as these seem, it’s surprising how they are mostly ignored. Being human, investors find mixing money and emotions very difficult. Here’s why I think they are ignored.
- No one likes selling an asset that has done well for them or buying an asset that has done badly for someone else — even though this is often the right thing to do.
- It’s very difficult to hold a different opinion to many others when there has been strong momentum.
- Accepting a decision can appear wrong for a long time, but still be right.
- It’s difficult to believe in a portfolio when the prices drop.
The wildebeest are prolific breeders and the losses they incur during their migration are relatively minor to the overall success of the herd. Lions, on the other hand, don’t breed as extensively so need to be a lot more circumspect about the risks they take. They are opportunists and don’t miss the obvious.
If you’re a wildebeest investor (you keep producing more money), you can afford to be less focused on the obvious. Being a lion investor means not only the protection, but also the optimisation of assets.