This article appeared in the Australian Financial Review during August 2018 and was written by Mark Draper (GEM Capital). The article was sourced from a 30 minute interview with Kerr Neilson (Platinum Asset Management). The audio track can be heard at the bottom of this article.
What can private investors learn from one of Australia’s best investors? I recently spent 30 minutes privately with Kerr Neilson, founder of Platinum Asset Management and Top 100 Global investor, with a view to share his wisdom.
Think about how the world is likely to be
Neilson suggests investors should spend time “conjuring up an image of the world as it is will be, rather than what is now”. This focuses on forward looking rather than relying on the past to develop an investment playbook. “Investors need to remain agile to cope with the idea of new possibilities rather than reverting to the ways of the old”
Australian investors should be reminded of this by the current position Telstra finds itself in, and they should also be thinking now about to what extent Fintech companies including Apple and Google may disrupt the banking sector.
It is the competitor response that matters most
It is not just the behaviour of the company you are investing with that matters.
One of Neilson’s signature thought processes centres around “It is how the competitors respond that matters most”.
Investment Research into retailing for example, would be incomplete without reference to Amazon.
Deal with the media overload.
Neilson believes the biggest problem investors face is dealing with the media overload. This can create huge biases in behaviour of investors. The most common is ‘availability bias’ where there is an obsession about the current news item which encourages investors to limit their scope to the most recent news and potentially lack perspective. This can lead to either pain or opportunity.
Neilson quotes China as the perfect example of Availability bias. “Certainly the country has too much debt, as do many countries, and yet we can find companies with attractive valuations that are growing at 15 – 25% per year and we are paying around 12 times earnings. He adds “it is not as if all these companies are going to be forced to do things by their Government. To the extent that this is a threat, we adjust the price we are willing to pay.”
Anchor decisions on fact, not momentum
Investors need to understand the reasons for owning particular assets and be clear about their expectations from them. It is only then that an investor can take comfort in the face of an upset. One of the problems he sees with passive investing (via index funds and ETF’s) is investors are simply buying momentum and the belief that ‘it has worked so well since the crash, why should we not do it’. He believes investors should question passive investment from the perspective of “what are the circumstances that have created this and why should they persist”?
Be aware of limitations of financial modelling
While the rise of Artificial Intelligence is already at work in investment management, Neilson is of the view that financial modelling of companies has its limitations. “It’s easy to observe winners in retrospect” he says. Recognising real talent, such as Bill Gates (Microsoft), before it is priced to perfection is where the real investment opportunities exist.
Great investors continually build their knowledge
The sources of available information has exploded with the internet. Neilson highlights that if he wants to learn about computer chip design he can attend a lecture on YouTube. “I agree with Buffett, it’s all about reading extensively and broadly” Neilson said. He also recommends investors should visit the website of companies they are investigating and listen to (or read the transcript) the quarterly/half yearly investor calls. The Q & A section of these calls where management is put to the test by analysts is an excellent source of insight.
The final take away from my time with Kerr Neilson was humility. When asked what are the greatest mistakes he sees investors make, he came back with “We all make mistakes so we should be careful not to point the bone too eagerly”. When pressed on his proudest moment in investment management, Neilson’s response after a long pause was “pride comes before a fall, we don’t spend a lot of time on pride. We at Platinum spend a lot of time on thinking about how many mistakes we have made and how to reduce those”.
From my personal experience meeting with Institutional investors for over 20 years, the best investors are humble.
Below is a podcast of the interview. Alternatively a full transcript can be seen by clicking on this link Full Transcript