At Quantum Financial we adopt a structured four pillar philosophy to investing.
Our four pillar investing philosophy
First we master the theory of investing and then we ensure we factor in the important lessons from the history of investing, the psychology of investing and the business of investing.
“There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description I might offer here ever approximate what it feels like to lose a chunk of money that you used to own”. Fred Schwed
If you think it’s wise to give surgery a go without years of practice and study mastering the extensive theory behind medicine, then sure, you may also consider it wise to invest without understanding the awesome array of respected theories underpinning finance.
A key lesson from portfolio theory is what matters the most is the behaviour of your overall portfolio, not the individual assets within it. A well-constructed portfolio can behave radically better than individual assets. When you understand the wealth of the theory underpinning finance you have the confidence, ability and knowledge to construct such portfolios
6 key lessons we’ve learnt from investing theory:
- If you take no risk then don’t expect any return. However, don’t take any more risk than you or your family need to. Risk and return go together like love and marriage, this I tell you brother, you can’t have one without the other.
- Being 100% right on your investment selections is impossible so diversify. Diversification is the only free lunch you will ever receive when investing.
- Focus on the big picture and construct your portfolio around your Investing Insights. Understand global and domestic macro-economic trends, sector trends, any political implications and expectations for growth in the economy.
- Be wary of those who hold themselves out as experts, especially those who have not formally studied finance or make light of their lack of knowledge of financial theory.
- Don’t lose money in silly ways – avoid unnecessarily risky investments such as hybrids, speculative stocks, mortgage funds, unlisted property funds and derivatives.
- Taxes and transaction costs are real – where and how you invest (your asset location strategy) can reduce your fees and taxes and so increase your total return.
“Those who don’t know history are doomed to repeat it.” Edmund Burke
Financial history teaches us a lot of important things. No matter which bubble or crash in history (and there has been lots of them), our collective memory of the financial debacles tend to be very short. We rarely truly learn the lessons each crisis teaches us. So the cycle repeats itself with each new generation of financial “wizards” effectively starting over with a blank slate. They get to package up debt in an unprecedented and novel manner and promise everyone that ‘This time it’s different’.
6 top lessons we’ve learnt from finance history:
- Markets always over-react. If you know that and keep your head you can profit.
- Anyone who tells you “This time it’s different” is full of the proverbial. It is never different.
- Reversion to the mean invariably happens (ie things come back towards the middle or average).
- High levels of debt (in some form or another) and irrational exuberance have caused every single bubble throughout history, without exception. What goes up must come down – eventually every single bubble pops.
- Yesterday’s winners are tomorrow’s losers. And vice versa. Don’t chase returns.
- Avoid financial products that are advertised on daytime TV or on the side of a bus. This includes derivatives, get rich quick or property seminars, funeral plans and FX trading.
“The investor’s chief problem, and even his worst enemy, is likely to be himself.”
If you’re a wildebeest on the African savannah, following the herd can save your life. If you’re an investor, following the herd can leave you more exposed than protected. As humans we’re not the fastest or strongest animals but we are the most social. Caring about what others think about our behaviour helps when it comes to morals and creating a strong cohesive society.
Follow 6 key rules to help you avoid getting into investing trouble:
- Be disciplined – anchor your portfolio against the agreed asset allocation and don’t act on gut or emotional reactions.
- Put a filter between your emotions and your investing decisions. For some this is the role their advisor plays.
- Our minds can play tricks on us so we place far greater weight on things that happened recently. You probably don’t remember the fear we felt around the Japanese tsunami, potential Greek default, or the Dubai property crash. Accept that market fluctuations (volatility) are the norm, not the exception.
- If you follow the investing crowd without thinking, you will end up a lemming plunging over a cliff. Always be aware of how the crowd behaves at extreme times.
- Don’t get attached to investments – they don’t care about you and you shouldn’t care about them. If you hold an investment that’s gone backwards hoping it comes good, ask yourself ‘Would I invest in that investment today?’ If the answer is no, then sell it.
- Entertain me! We try and keep investing interesting with our Investing Insights reports but investing by and large is boring so if you’re looking for entertainment, go to Crown Casino and put it all on red.
“A broker with a clientele full of contented customers was—and still is—a broker who will soon be looking for a new job.” Joseph Nocera
When Quantum Financial advisor Tim Mackay graduated from university, the keynote speaker at his graduation was the billionaire financier, George Soros, a friend of the Dean, and he was asked: “If you were graduating from university today, what would you do?”
Soros’ reply was illuminating: “I’d go and spend a few years working for a financial institution, become an insider so you can understand how the system works, and then go and do whatever it is you really enjoy doing.”
Following that advice, advisors at Quantum Financial have spent years in the financial markets and in investment banking across Sydney, London and New York dedicated to understanding how the financial system works and using that knowledge for their clients’ benefit.
6 key lessons we’ve learnt as finance industry insiders
- Simplicity in a well-constructed portfolio is beautiful, stupidity is not. Avoid speculative risky or complex investments that will lose you money.
- Don’t be naïve when it comes to investing – insiders will always be one step ahead of retail investors so don’t try to compete with them.
- If you don’t understand something, don’t invest in it. Just because the finance industry makes an investment sound exotic and attractive, this doesn’t mean you should trust them or invest.
- If it bleeds it leads. The media are in the relentless business of selling sensational headlines / articles. They are not in the business of providing sound financial advice.
- How you pay for advice is just as important as how much you pay for advice.
- Understand how you pay impacts the advice you receive. A broker wants you to trade more because the more you trade, the more commission they receive. An advisor tied to an institution wants you invest in that institution’s products; they may not be the best products but the firm gets paid more. An advisor charging a percentage of your assets will always want you fully invested so they get paid more (but not in property because they may not get a percentage of that). With a fixed cost advisor you pay an agreed amount up front and then they are on your side with advice in your best interests.
Acknowledgements: We draw inspiration from a wide range of financial sources but for this article we are especially give credit to William Bernstein’s excellent ‘The Four Pillars of Investing’.