Proactive investors will find much food for thought in this interview, where one top wealth executive reveals their top “money lessons learned” to findaWEALTHMANAGER.com.
Giles Rowe co-founded Henderson Rowe Wealth Management with Charles Aram in 2002, after twenty years in the investment business. A passionate advocate of direct equities investing, he has a background in M&A and corporate finance as a capital markets analyst and so has lots of advice on the right – and wrong – types of company to back.
“If it looks too good to be true, generally it is”
It’s no secret that markets are driven by the opposing forces of investors’ fear and greed. While being overly cautious as an investor is as much of a fault as being overly sanguine about risk, Rowe urges those thinking about ploughing into the latest “big thing” to think about the old adages:
All too often people are governed by greed; by what looks like the most fantastic opportunity. Except it’s mostly a case of: ‘If it looks too good to be true, it generally is’.
You see companies with fantastic track records which suddenly evaporate and explode. Sometimes it’s bad luck but quite often it’s because the whole rationale wasn’t sound.
One example is the frackers in the US, which were massively leveraged in a fast-moving sector, where you need to keep discovering, you need to keep on the treadmill. It’s too easy to go too close to the edge in good times and then suddenly when the leverage goes back on you, you are high and dry.
Look “under the bonnet” of your investments – as businesses
Rowe, like so many investors globally, admires the tenets of the “Sage of Omaha”, Warren Buffet, and advocates unearthing companies that represent good value by simply doing one’s homework and carefully monitoring them as businesses.
Rowe had an early induction into seeing the signs that one should be heading for the exits, in his first job at a mid-tier UK publisher. Here, he saw first-hand the deleterious effects of the firm needing an abundance of working capital and having to take bets on huge print runs, at the risk of long-term storage if sales failed.
Up against American houses that were flooding the market with a better, cheaper product, it became a very painful line of work.
So when I look at companies to invest in now, I always bear in mind that return on capital is terribly important. Also always examine the level of debt, as you can leverage usefully but you can also take it too far.
Never “let the tax tail wag the investment dog”
Tax-efficient investments offer a range of generous benefits across Income, Capital Gains and Inheritance Tax that could mean that they could form a very useful part of your portfolio. But these benefits are generous for a reason, since investing in smaller, unlisted companies (as they mostly entail) is undoubtedly at the riskier end of the spectrum.
Rowe warns investors to apply the same principles of “looking under the bonnet” just described to any tax-advantaged investments. Investors should ensure that everything in their portfolio is there on its merit as an investment:
Things like Enterprise Investment Schemes and Venture Capital Trusts are a lovely tax structure, but they might be packed full of products or ideas that may not be good investments in themselves.
I tend to focus on liquid stocks on main markets because I believe you’ve got to have some liquidity, and those stocks have got to have certain characteristics: again, good returns on capital and a good management track record. The trouble is then that they tend to be expensive, so good value companies can be very difficult to find. It’s all very much basic Buffet-like principles – a company with a good return can grow with good managers.
Every investment is a separate battle, so box clever
As a professional investor who focuses on stock-picking to add value, Rowe clearly likes high-conviction calls. However, investors need to “check their egos at the door”, so to speak and ensure that they don’t over-rate their abilities when it comes to getting ahead of the curve – information is at everyone’s fingertips today.
Every single investment is almost a separate battle. Every company is very different and although there are some principles you tend to bear in mind, you need to look at a whole range of things in the structure of a company’s financials and their markets and the management.
Unless you are very good at spotting things early you’ll miss it. Then your views are competing with everybody else’s and the value becomes a battle of wills.
Therefore, it’s much safer to pay a bit more to stick with companies that have a good track record and good returns on capital.
Investing is both an art and a science
The internet has undoubtedly empowered investors massively to make a start and construct their own low-cost portfolios. Investment tips abound. Yet Rowe cautions not to believe anyone who purports to have “worked out” how to play the markets. Investment success cannot be reduced to simple rules, although there are investment principles that make success more likely.
It’s not something you can reduce to a simple formula. Look at the trend, certainly. Technical analysis is underrated in many respects, but don’t rely upon it. Draw on it as one factor in making decisions.
Investing isn’t just a science, it’s an art as well. But you do need those basic things to be in place.
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Henderson Rowe is a London-based discretionary wealth manager that deploy a direct equities investment approach.