Hamish Douglass of Magellan was recently on a podcast giving his top 10 investor tips. So I thought I would repeat them here with our take on these tips, which by and large are all very, very good!
Tip #1: The importance of a margin of safety
“If you’re designing a bridge that can take a hundred thousand tonnes you don’t want to set the safety limit at 99,999.”Hamish Douglass
I absolutely agree with Hamish on this one. Although his quote is related to engineers, I’d like to think it carries equal weight when considering stocks and investing. Making every effort to build in this margin of safety make good commons sense. This is even more so if you are using investing tools such as margin lending, where you want to be sure you avoid a margin call at all costs. This will also ensure you don’t have to rush to sell stocks at the wrong time (I.e., when the marketing is in a downturn, as we saw with COVID).
Tip #2: The circle of competence
I describe our approach as an inch wide mile deep, and very clearly defined areas in which we have expertise.Hamish douglass
This is a ubiquitous approach espoused by the great man himself, Warren Buffet. I think it’s especially relevant for professional investors who are investing large amounts of OPM (other people’s money). As an individual shareholder, I will sometimes buy shares in areas I don’t have a piece of profound knowledge in – perhaps because of a specific tip or because I see an adjacent industry moving that I think will have an influence. For example, I own some biomedical stocks as a result of the pandemic, but I certainly don’t have deep expertise in this area. As individuals, we sometimes must rely on the experts like Hamish to advise us.
Tip #3: You have to be prepared to throw something in the bin
“That’s really hard because often you spend an enormous amount of time and effort researching, or you can be in investments that go wrong, and then you start to convince yourself “, oh, well, I can make my money back.”Hamish douglass
This is a general rule that applies to more than just investing. Sometimes we invest not just money but time into things that we realise at some point are just not going to pay off. So, we need to be prepared to throw what we have done in the bin rather than continue to invest time and/or money. It can be tough to do, and you will occasionally get it wrong, but I think it’s better to stop doing something than to keep going with the thought “I can make it back”, or “it will improve with time”. You usually know when you fool yourself, but it takes discipline to stop and turn in a new direction.
Tip #4: You have to be prepared to change your mind when the facts change
“And I find it very therapeutic to actually admit not only to yourself, which is the first one, but to admit publicly that you’ve made an error.”Hamish douglass
I think this is a good lesson for life, not just for investing. Our ability to understand the facts and form an opinion based on those facts is inherently human, but too many people these days don’t look at the facts and form opinions based on hearsay (social media posts, for example) rather than provable facts. When faced with new information that you were not aware of previously, it’s also ok to say, “Oh, I think I was wrong previously, with this new information I have now changed my mind”. Some believe that’s weakness, but I believe the opposite, and I think even more for Hamish for saying he likes to admit when he thinks he has made an error publicly.
Tip #5: A medium-term investment horizon
“It’s really important. It’s really easy to say. It’s really hard for people to do.”Hamish douglass
I think this comes down more to personal preference. I can understand why someone who manages other people’s portfolios would say this, though companies take time to build momentum and jumping in and out of stocks trying to time the market can be challenging and requires a laser-like focus.
Tip #6: The power of compound interest
“You don’t care whether Microsoft is underperforming the index in the next six months. It is irrelevant. What is relevant is whether those investments can compound for you over five years, 10 years into the future.”Hamish douglass
Yes! It’s just basic maths. When I first started investing, I put $100 a month away in an investment account and was so surprised when I looked at the balance five years later. Compounding works; it’s just basic maths! If you haven’t started yet, you need to begin investing from every payment you receive. You will be surprised how quickly it adds up, even if it’s only $10 at a time.
Tip #7: Emotional Detachment
“Buffet often says that the stocks don’t know that you own them, and that’s largely the case. And the way to think is that these stocks don’t know whether you own them, or you don’t own them, so don’t get emotional about it.”Hamish douglass
This can be hard for some people who get very attached to companies for a variety of reasons. I have been involved in angel investing, and I know how easy it is to get attached when you get a chance to meet the CEO or other execs, and you really like them and what they are doing. But even in that scenario, you need to step back and take a look at the overall picture, review the financials, the business strategy, the industry, and make a call on the stock, whether you love the founder or not!
Tip #8: Don’t pick up coins in front of a steam roller
“Robin Hood-style investments are crowd-driven investments, and really for people who don’t do their own work and analysis. To me, this is just crowd speculation rather than investing.”Hamish douglass
I love this quote, and it’s similar to what I said in my post to new investors. Investing in stocks is not a get rich quick scheme, and you can easily get your fingers burned if you think it is – or worse, you can lose an awful lot of money. Having lived through the internet boom, I saw some people put their life savings into stocks that ended up being worthless. It’s heart-breaking.
Tip #9: Crypto is a mass delusion headed to zero
“And I think it is inevitable that most of these digital forms of cryptocurrencies. that have no backing by government, or no tangible backing underneath them of any substance, will inevitably go to zero in the future.”Hamish douglass
I’m not sure I agree with Hamish on this one – though I know he isn’t alone in his opinion. While I’m not an investor in Crypto, I think it has been born from a different way of thinking, and I am not sure it will go to zero in the future. The issue I have with it is like that in point 8 above, many a treating it as a get rich quick scheme, and I believe that cannot end well for all those investors taking the plunge into Crypto. I also think the energy implications of the blockchain will need to be solved at some point for these currencies to continue to thrive.
Tip #10: … but we are headed to digital currencies
“We are going to move away from paper-based currencies of the world to digital currencies in the world.”Hamish douglass
Agree with Hamish on this one. It’s happening already!
The original article/interview can be found here.
Disclaimer: MiGain is not a financial advisor, and the above information is for general information purposes only. It does not constitute financial or taxation advice or a recommendation for a particular financial product and should not be construed or relied on as such. Please check with your advisor or your accountant to check how this information relates to your specific circumstances.