Damien Grant: Success with investments comes with sticking to what you know

Successful business people like Seeby Woodhouse became wealthy by focusing narrowly on their own business. Photo / NZ Herald
Successful business people like Seeby Woodhouse became wealthy by focusing narrowly on their own business. Photo / NZ Herald

Taking economic advice from financially impaired newspaper scribes, this columnist included, makes as much sense as seeking lovemaking tips from a eunuch. The financial pages overflow with advice and although some of it is insightful the calibre of our analysis on a given topic is not always apparent.

The most commonly peddled piece of media-driven financial advice is to spread your risk by not putting all of your eggs in the one basket. This mantra is repeated so relentlessly it has become an unchallenged article of faith.

Spreading your risk means diluting your returns. Although this does make sense if you are no longer earning and seeking to protect your capital, it is a poor strategy if you have a decade or two left in the workforce and have ambitions of real wealth.

Successful business people like Geoff Ross and Seeby Woodhouse became wealthy by focusing narrowly on their own business. Yet for every success story splashed across the financial and society pages are a dozen unreported business owners sweating over their BMW repayments.

We mortals who do not have the talent to build a vodka empire or an ISP or the willingness to endure the stress that comes with entrepreneurship are forced to decide how to allocate our meagre savings.

Although best known for his macro-economic insights, John Maynard Keynes was one of the first and most effective fund managers in history. For more than two decades he oversaw the endowment of King's College, Cambridge, resulting in a tenfold increase in capital. He summarised his strategy as follows:

"The right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.

"It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little."

It is possible Keynes also benefited from what today would be considered insider-trading, but might also have simply been diligent research. Still, the key lesson was that he invested capital intensely into what he knew.

His modern-day equivalent, Warren Buffett, also prides himself in shunning investments in things he does not understand; famously avoiding the internet boom and resulting tech wreck. For those who understand the digital age, avoiding technology would make little sense but for Buffett, who did not, avoiding it was sensible.

We all possess some degree of inside knowledge, areas of expertise that are unique to us. Making use of your own insights, contacts and understanding is more rational than taking a punt (or alternatively not doing so) on an investment because of something you read in the paper.

Invest in what you know and understand. Anything else is gambling.

- Herald on Sunday

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