Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

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.

 

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

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Investment strategies

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Economy

US election implications for investors and Australia

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes, trade wars and policy uncertainty. Here's what it means for markets going forward.

Retirement

The rising tension between housing debt and retirement balances

Australians are taking more mortgage debt into their 60s than ever before. Retirement planning assumptions haven’t adapted and could result in future income projections that ultimately disappoint retirees.

Investment strategies

Why megatrends can deliver big upside (and downside)

The magnitude and duration of society's most important trends are often underestimated. While these trends are usually touted as a tailwind, one in particular could have dark consequences for many assets.

Property

Fixing the construction industry house of cards

Australia needs to build new homes like never before but construction firms keep going belly up. Unless regulators act now, consumers will continue to carry the can.

Investment strategies

How investor portfolios have become riskier versus history

Risk in portfolios has dramatically increased as time horizons have shortened and investors have piled into equities. It's resulted in a growing disconnect between what investors need and what the financial industry is delivering.

Shares

The abacus, big data and a brief history of indexing

Equity indices have evolved over time, led by step-changes in our ability to manipulate data. Despite the rise of passive investing, they weren't initially meant to be investment tools.

Sponsors

Alliances

© 2024 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.