How to in­vest like a pro

Avoid the char­la­tans who just want to cash in on your lazi­ness

Money Magazine Australia - - THIS MONTH -

If I was to give you a stock tip, what would you do? I’ll tell you. You’d do what you al­ways do – what­ever that is. Ev­ery­body has their process for as­sess­ing what stock to buy and when – a habit if you like – and it is the in­tegrity of this very in­di­vid­ual process that makes the dif­fer­ence be­tween a suc­cess­ful in­vestor and a bunny.

The top fund man­agers and in­vestors are not lucky; they have not been blessed with a ge­netic abil­ity to pre­dict fu­ture share prices. Their suc­cess comes from the de­vel­op­ment and re­fine­ment of a process for pick­ing stocks. This re­quires hard work, losses, ex­pe­ri­ence and an in­vest­ment of time.

The al­ter­na­tive is to adopt a process on the in­struc­tion of an­other, and the tan­ta­lis­ing prospect of buy­ing a short­cut has spawned a co­hort of prod­ucts sold by he­roes and char­la­tans whose pri­mary pur­pose is not to en­dow you with in­vest­ment knowl­edge but to cash in on your lazi­ness.

One of the first such pro­cesses was de­scribed in Ben­jamin Gra­ham’s book The In­tel­li­gent In­vestor, en­dorsed by War­ren Buf­fett and mar­keted ever since by a le­gion of Buf­fett-quot­ing prod­uct sell­ers more in­ter­ested in your credit card num­ber than the ef­fi­cacy of their of­fer­ing.

For in­stance, you might have also heard of W.D. Gann, whose tech­ni­cal in­di­ca­tors are on ev­ery com­mer­cial piece of chart­ing soft­ware and whose the­o­ries still oc­cupy a chap­ter in ev­ery course on tech­ni­cal anal­y­sis. Gann’s son, John Gann, was a stock­bro­ker in New York. Alexan­der El­der, in his book Trad­ing for a Liv­ing, said: “Var­i­ous op­por­tunists sell Gann cour­ses and Gann soft­ware. They claim that Gann was one of the best traders who ever lived, that he left a $50 mil­lion es­tate, and so on. I in­ter­viewed W.D. Gann’s son, an an­a­lyst for a Bos­ton bank. He told me that his fa­mous fa­ther could not sup­port his fam­ily by trad­ing but earned his liv­ing by writ­ing and sell­ing in­struc­tional cour­ses. When W.D. Gann died in the 1950s, his es­tate, in­clud­ing his house, was val­ued at slightly over $100,000. The “leg­end” of W.D. Gann, the gi­ant of trad­ing, is per­pet­u­ated by those who sell cour­ses and other para­pher­na­lia to gullible cus­tomers.”

There are two types of peo­ple who of­fer an in­vest­ment process: those who sell it and those who do it. Fund man­agers do it (some of them, any­way) be­cause these days many of the very large funds are run by peo­ple whose job is not to out­per­form but to repli­cate a bench­mark. When you run bil­lions of dol­lars, if you want to keep your job you don’t have to be a top-quar­tile per­former; you just have to make sure you are not a bot­tom-quar­tile per­former. You have no choice when you are a large in­dus­try or su­per fund with thou­sands of mem­bers and many bil­lions of dol­lars. The tran­si­tion is forced upon you: from a fund man­ager try­ing to out­per­form to a “fund ad­min­is­tra­tor” of­fer­ing lit­tle more than ac­cess to the av­er­age re­turn less fees.

On the flip side are fund man­agers whose busi­nesses live and die on their per­for­mance, fund man­agers who de­velop so­phis­ti­cated pro­cesses that work, fund man­agers who go to tremen­dous lengths to find some in­sight, some edge, that an av­er­age, time-poor, un­der-re­sourced or lazy in­vestor won’t find, fund man­agers who mix other peo­ple’s money with their own and charge them­selves with the re­spon­si­bil­ity to not only make money for them­selves and their cus­tomers but to pre­serve their lifeblood, the as­sets un­der man­age­ment, in times of trou­ble. To men­tion these fund man­agers in the same sen­tence as a fund man­ager whose job it is to repli­cate the bench­mark while host­ing yet an­other branded event for 500 peo­ple in the botan­i­cal gar­dens at the ex­pense of their face­less in­vestors, with not a care in the world about fund per­for­mance, is an in­sult.

So if you want to “short­cut” your­self to a suc­cess­ful in­vest­ment process, keep your credit card in your pocket. What you need to do is iden­tify the suc­cess­ful and in­vested fund man­agers, go to their web­sites and read about how they do it. Most fund man­agers pub­lish their in­vest­ment phi­los­o­phy, method­ol­ogy, process or sim­i­lar as a mar­ket­ing ploy. Net re­sult: there are a host of in­vest­ment pro­cesses avail­able on their web­sites, most of­ten on the “About us” link.

Which fund man­agers are in­vested? Go onto the in­ter­net and look up the best per­form­ers in the past year. Or check the listed in­vest­ment com­pa­nies on the ASX (visit the ASX web­site) and look at the share price per­for­mance over one, three and five years. The cream will float to the sur­face.

Or, of course, you could ask me how I do it. My $31 mil­lion fund was up 22.34% last fi­nan­cial year. I am one of those who lives and breathes and dies by their stock-pick­ing per­for­mance.

Mar­cus Padley is the au­thor of the daily stock mar­ket news­let­ter Mar­cus To­day. For a free trial of the Mar­cus To­day news­let­ter, go to mar­cus­to­day.com.au

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