Reflections from an investor

August 2019

Written by Hamish Douglass, Chairman and Chief Investment Officer, Magellan Financial Group.

Insights gathered from years of investing include thoughts on how to find the right investments, how to let investments work for you, risk management and the best temperament to have when investing.

“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now. Over time, you will find only a few companies that meet these standards.” — Warren Buffett

While Buffett might make investing sound easy, few people achieve outstanding investment records over the long term as he has. The following sets out some of my reflections gained over the years.

These 13 reflections are organised into four topics:

Finding the right investments, letting your investments work for you, risk, and the temperament to learn from mistakes. You can be assured that this list is not definitive. Each day has moments of learning.

Finding the right investments

1. Standing on the shoulders of giants

“If I have seen further than others, it is by standing on the shoulders of giants.”Sir Isaac Newton

At Magellan, we believe in benefiting from the knowledge imparted by the best. Our investment philosophy has been influenced by some of the legends of the investment world: Benjamin Graham (The Intelligent Investor, in which he highlighted the importance of thinking of stocks as businesses, the concept that the stock market is a voting machine in the short term and a weighing machine in the longer term, and incorporating a margin of safety); Phil Fisher (Common Stocks and Uncommon Profits and Other Writings, where he highlighted the importance of investing in quality companies with superior returns on capital) and Buffett and Charlie Munger who brought these concepts together.

From such insights, we have developed an investment philosophy that at its core is about investing in a concentrated portfolio of the world’s best businesses purchased at attractive prices. The returns such a portfolio earns over time reflect the underlying returns on capital, growth prospects, competitive advantages and management capabilities of these outstanding businesses.

Our portfolio-construction process can be likened to a process for picking a sports team that can win a grand final. We find no appeal in picking a team of ‘B-grade’ players when we can scour the world for a team of ‘A-grade’ players. Unlike the coaches of many sporting teams, we have no salary cap to handicap us as we assemble fractional interests in the best team of outstanding companies at the most attractive prices.

If our investment returns have been better than others it is in large part due to the fact that we are standing on the shoulders of giants. Investing in a portfolio of outstanding businesses at appropriate prices produces superior outcomes and is more reliable over the longer term than any other investment approach we know. Critically, having a portfolio of outstanding companies is a huge advantage in times of adversity because it lowers the risk of large capital loss. As Buffett says: “To finish first you must first finish.”

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