A Short Framework For Investing Your Own Money
A Short Framework For Investing Your Own Money
Firstly, crises are not as rare as you may think. Secondly, you need to have realistic expectations from your share investments. Thirdly, there are always opportunities - a brief case study.
This is a speech given to audience titled:
‘A short framework for investing your own money’
In the next 10 minutes or so, I shall try to provide you with a framework for investing your own money.
I will cover three topics ever so briefly:
- Firstly, crises are not as rare as you may think.
- Secondly, you need to have realistic expectations from your share investments.
- Thirdly, there are always opportunities - a brief case study.
With all the noise we get from the media, it is very easy to believe that we're facing one of the worst crises ever. It certainly won't be a walk in the park with government’s overspending and creating money, but it is important to go back in history to realise that the system eventually sorts itself out
- In fact, the
economy is littered with a large number of financial crises starting with the railway building manias in the early 1800s as the country exp US anded West, to the well-known contraction of the great depression of 1929-1933. In those 3.5 years, the economy contracted by close to 30% andprices fell by about a quarter. The same sort of pattern has been evident elsewhere andthe workout tends to follow a saw-tooth type of recovery with lots of concern throughout!
Time doesn't permit me to elaborate but it is highly likely that these damaged economies will gradually be brought back onto an even keel principally achieved by the debasement of money. This process of sharing the burden is not attractive
- A more interesting observation is that for all the turmoil, the trend in the last 110 years has been for real earnings to grow by 2% per annum. This single figure hides huge swings
andeven includes periods when earnings did not grow! More interesting still, is that even in periods were earnings have oscillated in a wide b andbut with no upward tendency, real returns from shares have been quite positive. Over this 110 year period, real returns from shares have been considerably higher than real earnings growth andhave averaged 6% a year; in money terms, this was 9.2% a year in the case of the stock market. In the first half of that period, returns were quite modest at around 3.5% real return but a full 9% real return in the second half because earnings were treated as more certain US andshares were re-valued upwards. By contrast, over this long period bonds gave one a 2.1% real return andcash about a 1% real return.
Now this is important; of the 9.2% total return from shares over this 110 year period, nearly half came from the receipt of dividends.
The message from this section is that real earnings growth is much lower than many people believe
- I have sped through these first two points because the most important message I wish to convey is that the market always provides us with opportunities; come inflation, deflation, economic expansion or contraction, the behaviour of the crowds invariably results in imperfect pricing. At Platinum we try to exploit these by following two simple ideas.
Firstly, that the crowds tend to overemphasise the recent event,
Secondly; there is a natural predisposition towards extrapolating the present situation far into the future.
Before giving examples of this, I would like to deliver a couple of key bullet points.
1. The valuation of shares you propose to buy is critical; if you pay too much for a share you’re unlikely to make much money.
2. When assessing the price, it is essential to think about the sustainability of earnings
3. Be clear about the risks you are exposing your money to. This can be broken down into many categories; economic, financial, political, business type etc. For example, has your success herded you into an increasing exposure to Chinese dependent growth stories i.e. resource stocks. We saw at the turn of this century how excess exposure to tech stocks
Think carefully about the business you are buying. We have a preference for companies that can control their destiny, set their prices independently of their competitors because of their market position
4. Be patient
5. It is important to realise that the stock market owes you nothing. It is simply offering you a smorgasbord of opportunities; some are cheap
We have made some good money on individual stocks during this crisis period by ignoring the noise. Into the teeth of the European crisis in the middle of last year, we bought a company that was highly sensitive to economic activity. We were driven principally by considerations of value
There have been several other opportunities coming out of this crisis in Europe which have been very profitable for us including a company by the name of Amadeus which is listed on the Spanish exchange
These war stories are not meant to convey our proficiency but to highlight the fact that in the teeth of a gale, opportunities arise. Hold your poise, do your work, remain independent in thoughts
DISCLAIMER: The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.