Turbulent markets and testing times

“You should buy Aristocrat,” Rob told me confidently. “Why’s that?” I asked. “Well,” he replied, “it’s trading at about $20 and is about to have a 4-for-1 share split. If the price just gets back to $20, you’ll quadruple your money.”

That conversation took place in February 2000 when I was working at Macquarie Bank (now Macquarie Group) and coincided with the zenith of the technology boom. Personally, it was my most difficult time as an investor. I’d been honing my value investing skills since late 1996 (when I’d first read Roger Lowenstein’s biography of Warren Buffett).

But, almost without fail, every stock I bought promptly plummeted in price. That would have been tough enough. But it was made even harder by the fact that successful “investing” seemed easy at the time – you just had to buy any stock with “.com”, “e”, “net” or “tel” in its name.

Rob worked in a neighbouring department and was “playing the market” heavily. He was a firm believer in the “new paradigm” of the Internet and its ability to transform the economics of dozens of companies – some of which had only recently switched their business model from resources exploration. It seemed like every few days Rob was making 20 per cent or more on one or other of his investments.

Meanwhile, not only was I not on track to achieve my goal of a 15 per cent annual rate of return, I was going backwards. And I was also spending my lunchtimes and many hours each evening educating myself in the intricacies of accounting standards, investing theory and, of course, devouring dozens of annual reports each week. Some serious soul-searching was in order. Should I pack it in and just follow Rob’s tips?

In the end, I couldn’t believe that such obviously flawed investment decisions (as evidenced by his suggestion to buy Aristocrat on the basis of its share split) were the way to long-term prosperity in the sharemarket. And I eventually asked myself two questions that profoundly affected my investing future:

“Do you believe that the value investing philosophy you are following is sound?”

“Do you believe you are practising it with diligence, independence and skill?”

It dawned on me that if I answered both questions in the affirmative, then I should put my head back down, forget about what the bloke next door was up to, and keep trying to find undervalued securities. By fluke of timing, that turned out to be a financial turning point as well as a psychological one, and the two things might even be loosely connected. In less than three years (and with no debt), the value of the portfolio I ran more than trebled in what was a broader bear market.

While that was extremely gratifying, the point of this story is not to boast. In fact, it’s almost a confessional. Things currently feel like that 1998–2000 period all over again. Only this time it’s more difficult because not only do I have to deal with my own psychology, I feel an enormous sense of responsibility to our thousands of loyal members. Just as we were in the technology boom, we’re currently in a “one decision” market. All you need to do is buy a stock in the resources game and, chances are, it’ll go up.

At least that’s how it feels. But when such obsessions grip the market, you can never be sure when they’re going to end. While we’ve done a great job of steering members clear of the past 12 months’ disasters, the stocks we have selectively recommended have, in many cases, seen their share prices fall dramatically. Newer members have had their faith in our ability shaken. Long-term members have had their patience and loyalty tested. I’ve been asking questions of myself and my team.

And we’ve sought to make improvements where it’s sensible to do so. But, in short, the outcome for the team has been largely similar to that I arrived at very personally a few years ago – we remain convinced that value investing is the most sensible approach for genuine long-term investors.

If you’re feeling unsettled, or even fearful, about the share prices you’re seeing tumble each day, here’s a suggestion: put down the paper or switch off the computer. Focus on the performance of the businesses you own. Are the reasons that you bought them still valid? Are their competitive positions still intact? Have their dividends been cut? Are they likely to be?

Such questions are likely to be much more helpful to your long-term investment performance than fretting about share prices. Speaking from experience, I’ve been there and done that, and all I’ve got from it is a little less hair.