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A candid interview with a 25 year veteran of the stock market

By Adam King, Editor, CSS Blog

As we approach the Most Wonderful Time of the Year, I like to look forward to many of the traditions that make the Christmas period what it is.

Turkey with all the trimmings, decorating the tree, parents and grandparents passing out after a few too many, and something we watch in my family every year, The Queen’s Speech.

Now the irony of this is that I’m not really a Royalist. However I do appreciate and try to absorb any nuggets of wisdom that I can from anyone who has a vast amount of experience in areas I don’t.

So even if you have never watched The Queen’s Speech on Christmas Day, or don’t even like the Monarchy, I’d encourage you to put aside your scepticism this year and listen to the words of someone who has been the figure head of a country that has seen huge ups and downs during her Reign.

What does this have to do with investments?

Well it got me thinking. What is the one thing in life you can’t buy? What is the one thing that you have that can never give away or have stolen?

Experience

And experience is priceless. You can piggy back another person’s experience, but you’ll never replicate actually being there.

Done properly, finding someone with experience that is willing to share what they know can short cut any learning curve. Whether that is learning to play a musical instrument, losing weight or invest in the stock market.

Someone with experience can help you avoid mistakes along a path, as they’ve trodden it for you. They’ve experienced the emotion; the joy, the frustration, the highs and the lows. They have a structure and a process that has been battle hardened and tested until it works.

So I asked Wayne Collins, Co-Founder of CSS Investments whether I could interview him to see whether he could distil some of his 25 years of experience into a language you can understand, and use to improve your investing.

See if you can piggy back on the back of his experience!

It’s a 3 part interview as there is so much Wayne covers that I want to give you plenty of time to benefit from what he says.

So let’s begin!

Adam: Wayne, you’ve been in the industry nearly 25 years so you must been through some interesting events, cycles and market conditions. What are some of your key insights you’ve gained over this time?

Wayne: First thing I’d say is that successful investing is simple, but it’s not easy.

Secondly, a little knowledge can be a dangerous thing if not properly understood. Especially if it comes from the wrong source.

I’ll try to explain what I mean with a story that’s always stuck with me, which I believe is from JP Morgan during the late 1920s price crash. [Ed: It was actually Joseph Kennedy]

He was asked how did he somehow manage to miss the vast majority of the crash. The story in general goes that he was having his shoes shined and the shoeshine boy was giving him tips on the stock market. His thinking at that time was that if the shoeshine boy knows as much on the market is as he does; it’s time to get out as it’s a bubble.

That’s what I mean by a little knowledge is a dangerous thing. Taken on nothing more than someone’s word or opinion, you risk making bad decisions. You miss both the detail and the bigger picture, all at the same time.

Another simple example that’s a little more recent is the sub-prime crisis.

Here we saw hedge fund ‘cleaners’ (actual cleaners of their offices or managers homes) buying houses, without a wage anywhere near sufficient to fully fund these.

Some people saw this was dangerous and totally ridiculous, and like JP in the 1920’s, knew it was time to get out.

Adam: Interesting, I’ve never heard the JP Morgan story before. But are you saying that it’s important to be aware of how you’re getting your information?

Wayne: It’s not so much how, but where from, and in what context.

Look, anyone can pick a stock and get lucky. Those that do tend to dine out on it for a long time. I’m referring to friends, colleagues; the ‘shoe shine guy’ here. But there’s no consistency in that.

Same thing happens when you go searching for ‘stock tips’ online. There are some good publications and individuals that provide excellent services and have a good track record, but there are a lot who are chancers. It’s very easy now to throw up a website and call yourself a ‘Stock Market Expert’, and charge a monthly fee. Dig deep enough and you’ll find some of these have never invested a penny in the markets and have no business telling people what to do with their hard earned money.

It’s totally unethical and damn right wrong.

Adam: OK, I can see this is a touchy subject for you! So let me ask you another question. What’s the one thing that if you could wave a magic wand, you could help people understand about investing and the markets?

Wayne: This one is easy. Investing is a discipline of risk management, not stock picking.

One of the characteristics I’ve observed in pretty much every successful investor I’ve worked with, whether retail or professional is that they focus on developing their understanding of risk and money management.

As a result they will normally outperform someone who doesn’t. That’s because they understand that when you become involved in markets, you’re entering a place of risk.

I think I said it earlier; anyone can pick stocks and get lucky. The real skill of investing is understanding and managing the downside.

This part of investing or trading is not as ‘exciting’ or ‘interesting’ as picking companies, researching news etc., but it’s the engine that runs any portfolio.

It’s fundamental.

Without a systematic approach or plan for risk and money management, there is always the possibility of being wiped out by a freak event or crash.

Adam: Are you saying that you can avoid these events or crashes affecting your investments just by using risk management then?

Wayne: No, that’s just naïve. But you can limit the damage with proper asset allocation and risk management.

Look, if you’re in the market in long positions and the market drops you will lose money. That’s a fact.

Unless of course you’re operating over a longer time frame, allowing you to stay in and ride out this over time.

Even in this situation not every part of your portfolio is likely to return to its previous price, so taking losses and freeing up the capital to re-distribute elsewhere may be a smart move.

Adam: Is this what you’ve found to be a common mistake that investors make then?

Wayne: It’s part of it. I’m going to start sounding like a broken record here, but the most common mistake I’ve seen over the years is ignoring risk.

I have always found it fascinating, but this is something which I’ve observed a lot of investors fail to accept at a fundamental level. They haven’t accepted it deep down, so losing money is painful when it happens.

They accept that when markets are mostly moving positively, they can benefit from it. But they conversely disconnect from the opposite scenario when the markets turn against them. It’s almost like it comes as a complete surprise to them.

Those investors that succeed expect losses, but have a clear plan and a portfolio structure that allows them to absorb them, and that that’s the key.

Following the wrong plan for an ill-suited portfolio structure can see you get clobbered. It’s important that you select the correct strategy understanding this so you can afford to absorb losses.

With a consensus view of investing you can potentially weather the storm.


Part 2 will be published on Thursday 17th December, where Wayne will be offering up more key insights, talking about picking tops and bottoms of the markets and how to see opportunities in even the most challenging market conditions.

You don’t want to miss this!

Comments

  1. amwell44 says:

    You got off on the wrong foot with me, because I am a Royalist, but I do agree with your assessment of the Queen’s invaluable experience.
    Some good general advice from Wayne, but could I suggest it might be viewed as more authoritative if simple errors were avoided:
    The expression is: ‘down right wrong’ and you ‘weather the storm’.
    I look forward to the next instalment.

    • Adam King says:

      Well I’m not an ‘anti’ Royalist if that helps!

      There was a real passion when Wayne was talking, and as this was recorded and transcribed pretty much word for word to maintain his own voice, some grammar, expressions etc. might not be totally right. After all, none of us are able to edit as we speak, as much as it would help at times!

      Though I hold up my hands on your ‘weather’ observation, which I’ve amended. I missed that one!

  2. jd says:

    I hope he will clarify what he actually means by risk management.

    • Adam King says:

      As this is more of an exploration of themes Wayne has seen during his career, he doesn’t go into the technical aspects.

      However, if this is something that would be useful, I can certainly look to produce more of a ‘how to’ or a ‘guide to’ risk management in the New Year. Is there anything around the subject you would like to have covered in particular?

  3. VPS server says:

    This is one of the most helpful pieces of advice for investors in the entire book. Kahneman points to compelling research showing that checking individual investments on a frequent basis will lead to poor decision making. So why not save time and improve performance by turning off the daily market noise?

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