Learning the (investment) lessons of history

“History,” said one sceptic,” is just one damned thing after another.” For investors, it’s something else altogether.  Studying history is a great way to learn to be a successful investor – and help clients achieve their lifetime goals.

Investment experts will remind you that past performance is no guarantee of future performance – and they’re right. But the past does have lessons to teach us. We’ve been looking back at 50 years of Australian sharemarket history and distilled some of the most important lessons about investing. Here are three of our favourites.

Lesson one: ‘Chaos isn’t the pit, chaos is the ladder’* 

Over the past five decades the world has seen its share of chaos – wars, terrorism, economic crises, world-changing innovations and epochal elections.

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What we’ve learned is the importance of looking beyond the emotions around big events – crises like the ’87 crash and September 11, or bonanzas like the ‘90s dot-com revolution and resources boom of earlier this decade. 

As Perpetual Industrial Share Fund Portfolio Manager, Vince Pezzullo, says “People become irrationally negative just as they become irrationally euphoric. If you take a long-term view when others are panicking, you can buy a business which is selling for well below its fundamental value.”

Lesson three: Bank on the balance sheet, not the banks

“The balance sheet is the thing that stands between you and disaster,” says Perpetual’s Deputy Heads of Equities, Nathan Parkin. “When times are good, markets throw caution to the wind and chase companies that have a lot of debt and so a lot of risk. You’re better off future proofing your portfolio by buying companies with a good balance sheet.

You want to be holding businesses that have cash on their books and aren’t dependent on the banks when things turn ugly. Banks are great at lending you an umbrella when it’s dry. As soon as it starts raining they want it back again.”

Lesson eight: Be born in, or move to, Australia

Warren Buffett famously said two of the big reasons for his success were compound returns and being born in the US. You can make the same argument for Australia.

Australia has been a great place to buy shares. Credit Suisse’s Global Investment Yearbook tracks sharemarket performance as far back as 1900. According to their research, Australia has been the world’s second best source of real sharemarket returns – generating an average, after-inflation return of 6.7% a year over 116 years.

At Perpetual we believe it’s still a great place to buy shares – we have a proven regulatory structure and an economy that still has sound fundamentals – especially by global standards. Our tax system, with dividend imputation and favourable capital gains treatment, is a positive for share investors – especially in industrial shares where dividend imputation levels are usually higher than for resources.

You can find the rest of these lessons – and brief tour of Australian investing and economic history - in our new eBook. ;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=?" BORDER="0" HEIGHT="1" WIDTH="1" ALT="Advertisement"> Decimal to Digital – Lessons from 50 years of investing in Australian shares. 

*Game of Thrones
 

This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The relevant product disclosure statement should be considered before deciding whether to acquire or hold units in the Fund. The relevant PDS can be obtained by calling 1800 062 725 or visiting www.perpetual.com.au. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.