Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

30 October 2025

Home / 460

Investment 101 and the greatest risk in investing

I have been trying to correct some basic investment misunderstandings, apparently with little success. Here are three lessons in Investment 101.

Three incorrect assertions

Some people interpret:

1. Shorting Tesla as being against the amazing Elon Musk, against Green, against innovation.

Lesson 1: A great firm with a great leaders and great products - so long as these are understood by the market and priced in - will deliver a fair return only. To drive great returns, the firm must surprise the market with even more amazing products. Empirically, storied firms tend to be priced for perfection. The market expects the impossible and the forward returns tend to be poor. It's not because the company becomes bad but because the current price has baked in unreasonable growth and profitability assumptions.

2. Underweighting US as anti-American values, betting against US ingenuity, disapproving all that is wonderful about US and its contribution to global prosperity.

Lesson 2: While prices may not be rational, they do reflect consensus. If your views and information are similar to consensus, that's not a bad thing. It just means you read similar information and analysis as other market participants and then your views cannot be predictive of better future returns. For example, we can agree that the US economy is wonderful and that China has a lot of issues. That this is obvious means prices reflect this consensus. Indeed US valuation has been 50% more expensive than China. China's equity performance relative to the US will not be determined by the consensus that China isn't a democracy with checks and balances. It will be determined by whether the US proves to be infallible and China remains as bad and incompetent as headlines have sold it.

3. Diversifying into China as supporting the CCP, favoring autocracy as a political system, ignoring obvious risks posed by China's political agenda, ignorant of China's slowing down.

Lesson 3: Investment risk is not related to an investor's familiarity or comfort with an asset. A tech executive investing in a tech stock doesn't make that stock less risky to him. American's home country bias doesn't make US stocks less risky to US investors. Familiarity and comfort tend to cause people to underestimate the true risk. That overconfidence is far riskier. Having access to Bloomberg, to broker research and CNN doesn't make your portfolios safer. It makes you overconfident and liable to ignore the unknown unknowns. It makes you confuse priced common knowledge as if they are unique insights that give you an edge in forecasting stock prices.

Is your view already a consensus and priced in?

Despite the best efforts of almost every investment book, many investors, including those that manage money professionally, continue to confuse a good company or country with a good investment.

So what is the greatest risk in investing? It is in not understanding that your fears and insights are common and already priced in, or already over-priced.

 

Jason Hsu is Founder and CIO at Rayliant Global Advisors and Portfolio Manager of Rayliant ETFs. Republished with permission from the author’s LinkedIn newsletter, The Bridge.

 

  •   1 June 2022
  • 3
  •      
  •   

RELATED ARTICLES

The 9 most important things I've learned about investing over 40 years

Improving financial literacy for women is a necessity

Charlie Munger on Buffett, gambling, Apple, and China

Firstlinks is sponsored by:
banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Latest Updates

Investment strategies

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Retirement

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

The ASX is full of broken blue chips

Investing in the ASX 20 or 200 requires vigilance. Blue chips aren’t immune to failure, and the old belief that you can simply hold them forever is outdated. 

Shares

Buying Guzman y Gomez, and not just for the burritos

Adding high-quality compounders at attractive valuations is difficult in an efficient market. However, during the volatile FY25 reporting season, an opportunity arose to increase a position in Mexican fast-food chain GYG.

Investment strategies

Factor investing and how to use ETFs to your advantage

Factor-based ETFs are bridging the gap between active and passive investing, giving investors low-cost access to proven drivers of long-term returns such as quality, value, momentum and dividend yield. 

Strategy

Engineers vs lawyers: the US-China divide that will shape this century

In Breakneck, Dan Wang contrasts China’s “engineering state” with America’s “lawyerly society,” showing how these mindsets drive innovation, dysfunction, and reshape global power amid rising rivalry. 

Retirement

18 rules for ageing well

The rules to age successfully include, 'the unexamined life lasts longer', 'change no more than one-eighth of your life at a time', 'nobody is thinking about you', and 'pursue virtue but don’t sweat it'.

Sponsors

Alliances

Site Map

About Firstlinks

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.