Our Investment Philosophy
Similarly to the world’s leading investors, such as Buffett or Bogle, Magus believe that nothing is more important to long-term investment success than a clear investment philosophy. An investment philosophy is based on the intractable belief you have in the principles and practices that guide your decision-making.
We believe that the important thing about an investment philosophy is that you have one you can stick to. The significance of this statement is that without a set of investment fundamentals you can truly believe in, you are going to be highly suggestable to all sorts of investment news and opinions. In short, you’ll be a rudderless boat influenced by the tides and unfavourable headwinds, and these external forces will govern your investment outcome, not you. They will rule over your emotions and, quite frankly, can often make your investment experience a miserable one.
Sooner or later, the markets will test your resolve. Just as a personal philosophy helps you deal with adversity in other areas of your life, a sound investment philosophy can help you withstand the ups and downs of the markets and stay the course, guided by the things that really matter to you.
In order to remain on your chosen investment path, the philosophy must be simple, well founded, consistent through time and coherent. Above all, it must make sense to you at a logical intuition level. We don’t ask you to take all the exams we have or digest the mountain of books we have, so it is vital that what we suggest must resonate quickly and give you confidence that we know our stuff.
Our lifelong investment programme is built on a logical and robust framework. It is grounded in investment theory, supported by empirical evidence and enhanced with an insight into the behavioural traps that all investors face. We have spent considerable time researching the theory and the evidence to create an investment programme that we, and you, can fully believe in.
The Five Guiding Principles to Successful Lifelong Investing
We follow 5 guiding principles that provide the backbone for how we think about investing.
1. Have faith in capitalism and confidence in the markets
Capitalism, whether you like it or hate it, it is a robust economic system that has delivered incredible developments to benefit mankind. Any long term stock market index will show an upward trend.
As investors, we have the ability to share in some of that innovation and be rewarded by investing in the markets, either as part-owners of companies – via shares and receiving dividend payments and, hopefully, rises in the price of shares owned – or by lending to governments and companies – by owning bonds - in return for interest on the money borrowed from us. On average, since 1900, UK equities have delivered returns of around 5% above inflation, whereas government bonds and cash have delivered returns substantially below this at 1.3% and 0.8% respectively.
As investors, we need to keep faith in capitalism and recognise that the markets are an efficient mechanism for rewarding those who provide the capital for businesses looking to grow.
2. Accept that risk and return go hand in hand
One of the inescapable truths of investing is that to achieve higher returns, you have to take on more risk. That seems logical enough, but you would be surprised just how many investors seem to think that it is possible to get high returns with low risk.
– WILLIAM BERNSTEIN, AUTHOR OF
‘THE INTELLIGENT ASSET ALLOCATOR’
Risk should not be feared, because when appropriate risks are taken, they are the source of returns that investors seek.
The one thing we know for sure about risk is that if an investment looks too good to be true, it probably is. If you ever see such an opportunity, you need to establish what the hidden risk is as you have not spotted it. Risk and reward are always related.
3. Let the markets do the heavy lifting
Investment returns come from either the market or from investor skill. You either accept what the market will give, or try and beat it by market timing; when to be in equities or out of equities, or by stocking picking individual stocks that you think will deliver a higher price in the future.
Trying to beat the market – through either market timing or stock picking - is a tough game, with very few winners, and in our view is not a game worth playing. This philosophy places us with other sophisticated investors who use empirical evidence to build an investment approach with the greatest chance of delivering a successful outcome. We avoid trying to market time or pick stocks.
4. Be patient. Think long term
One of the great challenges that investors face is that there is no quick way to investment success.
It is time that allows small returns to compound into large ones for the patient investor. The reality is that markets go up and down with regular monotony and because of this volatility, impatient investors too quickly lose faith in their investments. The wise words of Warren Buffett – one of the world’s best known investors – are worth recalling.
– WARREN BUFFET
If you want to be a good investor, you have to be patient. On your investing journey, you will spend time going backwards, recovering from set-backs and then surging forward, often in short, rapid and often unexpected bursts of upward market movement.
You just have to stick with it. Remember that you have to be in the markets to capture their returns.
5. Be disciplined
Patience is a virtue: discipline is an essential. To generate good long-term returns it takes time, patience and belief in the markets. It is essential to be disciplined to stop yourself succumbing to impatience and ill-discipline. Discipline comes from sticking to a well worked philosophy; constructing robust portfolios that can weather the investment seasons, not chasing elusive returns nor jumping on the band wagon of dramatic market rises. Discipline also means not becoming despondent about short-term, unimportant market noise, or abandoning your long-term strategy.
We all know stock markets go up and down, yet people still worry about falls in their portfolio value between review meetings. According to behavioural finance, we tend to feel at least twice the pain of losses than we do the emotional uplift of gains. So every time a portfolio falls, we feel glum and not so elated when it rises. Why is it the BBC news always reports large falls in the FTSE but never reports rises – it’s because only bad news sells. The key to discipline is to realise it is incredibly common for markets to fall and to not look at your portfolio too often.
The more often you look, the greater the chance of seeing a loss and the more pain you will feel. As the wise old saying goes: