CLYDE ROSSOUW: Lessons learnt from nearly 30 years of investing

Ninety One’s head of quality, Clyde Rossouw, has managed portfolios through numerous market crises and periods of rampant buoyancy. He shares some of the key investment lessons he has learnt:

• Have a clear investment philosophy and process. Investing successfully over meaningful periods demands that you have a well-defined philosophy and process. The key is finding a process that works and sticking to it. Chasing your tail will only result in disaster. Being disciplined is crucial, particularly through periods of performance pressure.
• Investments do not simply live on spreadsheets. While you need a solid knowledge of statistics and financial accounts to value assets, understanding the psychology of markets and investor behaviour is also key to maximising investment success. Spend equal time studying history, economics, psychology and accountancy. History helps us make sense of countries’ policy regimes over time and the factors that shape the global macroeconomic environment. If you don’t understand the history behind certain markets, you won’t appreciate why asset prices don’t always revert to their long-term mean or average level.
• Align temperament, intellect and experience. Maintaining an even temperament is particularly important when you face a situation with a highly uncertain outcome. Pundits reading the tea leaves would have you believe they have the answers, but the reality is we invest in a highly unpredictable and fluid world. Forecasting doesn’t work. When you think about any investment decision, the first question you must ask yourself is, what edge do I have? Second, you need to consider whether you have superior insight based on the work you have done. And lastly, have I seen this before?
• Things go wrong; learn from your mistakes. I wish I could say that every single investment our team has made has been a success, but that isn’t the case. You need to accept when you are wrong, know how much money you have lost, and learn from your investment mistakes. Avoid falling in love with a stock, sticking to losers for too long or investing before doing a proper assessment of the investment case. Limit losses, take justified position sizes and don’t take inappropriate risk. Leaving room for error allows you to stay in the game after shocks.
• Have a differentiated position. How do you deliver results and generate outperformance? You need to be an early holder of a different investment idea that, ultimately, contributes to the portfolio. It’s one of the key tenets that drives an active manager’s ability to outperform. Being different just for the sake of it, doesn’t generally lead to desirable outcomes for investors.
• Be curious, even sceptical, but not cynical. You have to be curious to find different ideas, but this can lead you down many a dark path, so it’s important you hold a healthy dose of scepticism. It’s also important to differentiate between scepticism and cynicism. If you are cynical about an idea, you will make mistakes because your view will remain fixed — no matter what evidence is produced. If you blindly believe every great “investment story’’, you will also make mistakes because you need to assess whether those stories are based on facts.
• The best “investment stories” carry the highest potential to lose money. There is no shortage of good “storytellers” in the investment industry. Many of these investment stories could cause an investor to lose a lot of money. These stories are often used to support a particular agenda. Don’t chase the popular narrative. You may find yourself back-pedalling when the story unwinds.
• If you can’t value an asset, you can’t quantify risk. Markets move through different stages — at times, valuations don’t seem to matter, and undue exuberance sets in. Eventually though, fundamentals will start driving the broader market again. This leaves investors who own assets that they can’t value exposed to sharp market corrections. If you own something you can’t value you have no idea what the risk of losing money is. There are countless examples of this in the world of cryptocurrencies. Stocks, bonds and property all deliver cash flows, which make them easier to value. That is why we include them in our portfolios, when there is a good investment case to be made. Currencies are equally important to understand if you want to be successful in managing multiasset portfolios for SA clients. You can value currencies using models applying purchasing power parity and capital flows.
• Don’t confuse luck with skill. When things go well, many investors attribute it to their skill and when that same share goes down, they feel they were unlucky. Sometimes, luck not skill can result in a payout. Luck isn’t usually repeatable. So, from an investment perspective focus on what you can repeat and don’t place too much emphasis on outliers — there’s likely to be an element of luck you can’t duplicate.
• Take risk. Manage risk. With so much focus on negative headlines it often feels as if it’s prudent to be negative. When it comes to investing, however, negativity rarely proves to be a sound decision. Over time, you can’t avoid investment risk because you simply won’t create real wealth. Hiding in a perceived “safe harbour” will lose value over time as inflation erodes the purchasing power of your hard-earned savings.