The advice that shaped the careers of some of Australia’s best investors

In my humble opinion, one of the best financial movies ever made was The Big Short, which was based on Michael Lewis’ book of the same name.

It profiles a handful of traders who were able to successfully identify and profit from the mortgage crisis in the US, which became the global financial crisis of 2007/8 – the worst global economic crisis since the Great Depression.

In that movie, my favourite line is “Yeah, you got a sound bite you repeat so you don’t sound dumb but come on." 

The line refers to the fact that most people when talking about the GFC at dinner parties, had a line that they would trot out so as to look informed. Ultimately, however, they had no clue what really happened, nor why.

So, why the long preamble to a wire titled “The advice that shaped the careers of some of Australia’s best investors”?

Well, I’ve been around long enough to understand the difference between empty sound bites and valuable, practical pieces of advice that have helped shape investment careers.

I’m much more interested in the latter. The former I can get from any investing book. The latter I can only get if I ask very nicely.

In that vein, over two instalments I’m going to bring you the responses of some of Australia’s most well-regarded fund managers to the following question.

What is the one piece of investing advice that has stayed with you throughout your journey as a fund manager?

Without further ado... 

Emma Fisher – Airlie Funds Management

Nearly a decade ago I made (hopefully) the worst investment call of my career, very early on in my career, with a buy call on Slater and Gordon. 

There were many bad days as the analyst covering that company, but one particularly bad day saw the stock off 30%. 

A very senior analyst I worked with, older and much wiser than my then 25-year-old self, took me aside and said “Turn off your computer, go outside and go for a walk in the Botanic Gardens. While you’re walking don’t think about the stock or markets. Remind yourself about all the people in your life who love you, how well you did at school, and remember the things you achieved at university. Everyone makes mistakes, but don’t let it make you go to water on yourself. At some point, you can reflect on what you’ve learnt through the experience”. 

It was a real kindness that I’ve thought of many times as I’ve inevitably made subsequent mistakes over my career - they never hurt as much as that first time. You make terrible decisions under pressure, and watching a stock blow up in real-time is a pressure. 

Sometimes the best thing to do is to move away from your desk, to move away from the problem, to get out there in the real world and remind yourself that the sun is still shining, people still love you if you’ve made a dumb mistake, and there’s always a valuable lesson to be learnt. 

In the end, it was invaluable for me to learn so viscerally, and so early on in my career, about risk in investing: the risk involved in acquisitions, in debt, in roll-up business models, in businesses that lack hard assets. 

But it took a senior colleague’s kindness and wisdom to give me the space and grace to learn the lesson.

Katie Hudson - Yarra Capital Management

"Buy the compounders"

The best piece of investing advice I received was to buy the companies that compound earnings growth over time.

Cochlear (ASX: COH) has quietly compounded 8.5% pa earnings growth over 20 years, which translates to over 400% increase in earnings – the dividend is higher today than the share price when I started covering it not long after the IPO. For a low-yielding company, that is no mean feat.

Compounders are not necessarily the 40% sales growth SAAS companies – while you can make money there, the valuations are often challenging, and many don’t translate the sales growth into compounding earnings growth.

My favourites? Quiet compounders. They may deliver 7-10% earnings growth, sometimes more or less, but consistent compounding over time adds significant value. These companies gain market share, drive new product adoption, and often innovate to extend their growth runway. For example, Cochlear’s penetration of its addressable market is lower now than 20 years ago, despite the compounding growth; the business expanded its market through innovation.

For retail investors, there is an added benefit. Staying fully invested in a compounder avoids selling, paying tax and reinvesting lesser after-tax dollars.

It is important to recognise growth is not always linear. Sometimes, a misstep presents the ideal time to invest in a compounder. This could be Fisher and Paykel Healthcare (ASX: FPH) and Nanosonics (ASX: NAN) now. In our portfolio, EBOS Group (ASX: EBO) has been quietly compounding for many years, while AUB Group (ASX: AUB) and Netwealth (ASX: NWL) are doing it right now.

Adam Chandler - Claremont Global

I started my buy-side career at a London-based hedge fund. The fund’s investment mandate was broad – everything from unlisted businesses in Asia to merger arbitrage. 

Every day there was a potential investment to be made or sold, a trade to be put on, or taken off. A way to make, or lose, money. There’s a natural inclination to want to be productive, which in funds management can sometimes translate into excessive trading. 

One of the founders I worked with, an experienced investor and a great guy, helped impress on me the importance of selectivity and patience, “Do nothing at all, unless there is something worthwhile to be done."

Trading has only become cheaper and easier to execute over the last two decades, further promoting overtrading. 

But in listed markets, the sitting is so important; to have that discipline to wait for an attractive opportunity, and then to get out of the way and let it compound.