I recently made what I consider to be an investment mistake in my personal portfolio. Strangely, it doesn't look like a mistake on paper, but you only become a better investor by admitting and learning from your errors. Whether a work or a personal investment, a post-mortem is an important process to go through whether the investment was successful or not.
I will share my broad reflections of this experience with you. For confidentiality reasons, I cannot provide all of the details but I don’t think that stops me giving some useful insights.
For personal background context, you should know that I work in wealth management, study and have a young family. I love my work and have had a history of prioritising my work and my study above my personal finances. I have a lifelong trail of personal operational slippages which have cost me through the years, for example, not claiming refunds on expenses and not completing paperwork to accept free staff share offers at previous companies. At least things now align better as my super is invested in the fund that I manage at Mine Wealth + Wellbeing.
A little while ago, I made a private equity-style investment. For much of the time I was invested, I felt uncomfortable with the exposure. Recently it was restructured and I was fully paid out, both principal and interest. Overall, if you just looked at my outcome (low double digit annualised returns) you would say that it was a good investment. But deep down I know I made some fundamental mistakes.
What were my mistakes?
The first, and largest, mistake was the time I spent undertaking due diligence. Due to time constraints, I put in what I thought was a sufficient amount of time, but on reflection I should have put in a lot more. How much time is the right amount? The answer to this question is not known at the start of the due diligence process; rather a point is reached where you feel confident you have an appropriate amount of insight. Allocating time for due diligence is especially important in the case of illiquid investments where there is no opportunity to capitalise on subsequent learnings (unlike listed stocks for example when you can change your mind and exit the position with little cost). Different types of investments require different levels of due diligence. In the case of a private investment a large amount of time should be dedicated to the business model, competition, financial analysis and the structure of the transaction.
The related mistakes were broadly flow-on effects from the first mistake. When you are time poor you do less primary research (your own independent research) and take shortcuts such as relying on the information presented to you and taking confidence from the quality of the co-investors. These are examples of shortcuts that work well often but not always.
It’s also important to reflect on what went well. I was involved in the structuring of the original investment and overall this was well-designed in the sense that it provided lots of protection for investors. Also by investing alongside some high quality investors it did prove that they were able to have some positive influence on the final outcome as the investment wavered (and it did get hairy: at one point, interest payments were missed).
Lessons for other investors
A post-mortem is a valuable process for all investors. It allows you to reflect on what went right and wrong and to consider improvements to your investment process. If you are reflecting as a group (for instance, we do this at Mine Wealth + Wellbeing) there can be moments where people may feel defensive but if the session is run positively then a lot of good can come from it.
The reflections I make are largely for personal investors, and particularly those who have an SMSF:
- As much as investing is interesting, do you have the skill to select your own investments? What is your personal investment edge that justifies selecting your own investments rather than relying on professional fund managers or using passive investments?
- If you believe you have the skill, do you have the time to appropriately assess investment opportunities and conduct ongoing monitoring on each of your investments? In my case I believe I have the skill but time was the issue.
- Are there investments that you are considering because they sound interesting and would be a great conversation starter? If yes, do you have the skill and time to appropriately assess and monitor these opportunities? Sometimes these skills need to be even more specialised. Strategies like hedge funds and private equity sound exciting but they can be much more complex to assess.
- If you are considering private (illiquid) investments, then the issues raised about skill and time are even more important: you cannot easily reverse your decision once it is made.
Following on from my self-reflection I changed the way I invest my personal portfolio. I acknowledge that I don’t have enough time to undertake due diligence and conduct ongoing monitoring on a range of investments. Indeed, my personal investment process is well below the investment process I apply at work. I came to the view that this makes investing in private, illiquid investments a bad match for me at this stage of my life. So now I invest in liquid assets through managers that I know very well and trust. As my personal situation changes then the scope of my personal portfolio management activities may also change.
Being honest with yourself is an important starting point when designing and evolving your personal investing strategy. How well does your current strategy line up against your skills and time availability?
David Bell is Chief Investment Officer at Mine Wealth + Wellbeing. He is working towards a PhD at University of New South Wales.