A Simple Investment Strategy

No penny drops louder than an ‘ah ha’ moment. It’s the clarity and certainty that makes all the noise.

As is often the case, ‘ah ha’ moments are usually so simple you’re left wondering why on Earth you never saw them in the first place. But that’s what makes some lessons so profound…their simplicity.

Mine occurred while sitting in a must attend seminar as a junior stockbroker working for Ord Minnett in the late nineties. We were at the Regent Hotel, Sydney, when this bloke stood up to speak and if ever there was someone who could have doubled as Ned Kelly in a suit, he was it. His big black beard was a ripper, you could have hidden a flock of pigeons in it.

Turns out he was one of the smartest strategists in Australia and little did I know it, he was about to floor me with the simplest of all investment ideas.

We’d just been hit hard by the Asian Crisis in October 1997 and everyone was worried about the knock-on effects for Australia.

The poetry of it all was also scary because it was exactly ten years since the ’87 crash. Stock and property prices had already taken a hit and there were fears of major reprisals, including a recession.

Speaking of patterns, ten years later we had the start of the GFC, September 2007. And look where we are now?

So, should we be worried? Yes and no.

Chances are we will get something similar to another GFC, but it’s not what happens to us, it’s what we’re invested in that matters most. Read on and you’ll see what I mean…

Campbell Gorrie was the speaker and over the next five years I got to know him very well – a chain-smoking genius brimming with brilliance. As for me, I just happened to be in the right place at the right time. Maybe the student was ready and the teacher appeared. Dunno.

The Message
His message to the thousand plus audience at The Regent was simple.

He said, “I want you to imagine this Asian melt-down triggers a major recession and all our incomes are halved. That’s right, halved!” (The dolled-up lady next to me went into a melt-down of her own. She said the ‘F’ word so loudly the five rows of seats in front of us turned and stared…and then said something similar themselves). It was a memorable night.

Campbell continued. “Suppose all our incomes are halved, what products and services will you absolutely keep purchasing regardless?”

“Go on”, he said. “I want you to write them all down”.

It seemed like such a rudimentary task for a young stockbroker, but it was only out of respect for the Ned Kelly lookalike that I did as I was told.

He said, “Now take a good hard look at your lists, I guarantee everyone’s list looks similar. But here’s the best bit, they are the products you need to be invested in as well, because even if all our incomes are halved, everyone will continue purchasing those products regardless. They are recession proof and bomb proof (war proof). They are usually the most tax effective investments as well”.

This was a game changer for me and it immediately removed the myth and mystery out of investing. The pennies were now dropping louder than the lady’s ‘F’ bomb.

Put simply, all you need to do is invest in those products and services we consume on a daily basis – the STAPLES. i.e. the banks, energy, food, infrastructure, telecommunications, etc. All the stuff that is essential to our survival.

Test it yourself. Let’s say your income is halved, are you going to cut out your groceries, turn the power off, close all your bank accounts, and never use your phone again? No. You might cut them back but you won’t cut them out because they are essential to your survival.

Real estate is the same. The best investments are those that have all the staples nearby – schools, shopping centres, sports grounds, hospitals and good infrastructure (transport).

Consumers versus Investors
One mistake I see people make is looking at investments from an investors point of view instead of a consumer’s point of view.

Investors try and ‘pick’ trends or the next boom industry but it’s so easy to get wrong.

Consider the gold rush in the 1850’s. The people who made the most money were the ones selling the picks and shovels, not the miners searching for gold. The problem was, picks and shovels were not very sexy. After all, any fool can sell those, only a genius can strike ‘gold’.

The best investments are usually found with microscopes, not telescopes.

The Wall of Worry
There is always a reason to worry about the markets, and right now, there appear to be any number of reasons to be fearful – terrorism, exploding debt ceilings, another offensive Trump Tweet, some crazy in Korea, cyber-crime, overpriced property markets, lack of leadership, and around and down it goes.

The problem with staring at the wall of worry is you end up looking for things that are not there. The pay-off is you get to feel intelligent, but for all the wrong reasons.

A Simple Solution
If you had of invested $10,000 into a basic index fund covering the top 300 stocks in 1984, its value 30 years later in 2014 would have been $278,615.* During that time we’ve had the ’87 crash, the dot.com bubble (tech wreck), the GFC, Y2K, 9/11, Bali bombings, two wars in Iraq, oil spils, tsunami’s, Brexit, and endless terrorist attacks.

The bottom line is this. So long as you stick to the basics and invest in everyday consumables you’ll be ok. The rest is just noise.

Have a great weekend!

Adam

*Source: Vanguard Investments. Final value assumes all dividends are reinvested.

Back paddock – What do you see once in a year, twice in a week but not in a day?

Ready…

The letter ‘e’.