The paradoxes of investing

To grow and protect our capital over the long term, we need to strike the right balance between patience and the urgency to act when the facts change.

We aim to be patient, long-term owners of great businesses. We want to take the time to get to know a business rather than rushing into an investment we don’t fully understand. We also want to be patient once we do own a business, recognising that every business will eventually endure tougher times and go through periods of share price underperformance.

But we can’t let our patience devolve into inaction or inertia. We need to be willing to sell an investment with urgency as the facts change. In particular, through periods of share price volatility, we also need to be able to take advantage of price dislocations that can be short-lived.

3. Trust vs. scepticism

We need to constantly balance our trust in the management teams of our portfolio companies with a healthy degree of scepticism when their messaging and the performance of a business deviates from our expectations.

We can’t expect perfection – after all, management are only human, and have their own biases. So when executives do make mistakes, we assess the severity of the impact, whether they’re taking the right corrective actions, and look for evidence they’ve learned from the mistake so it’s unlikely to be repeated.

But the allure of the narrative can be compelling. We need to remain sceptical about whether we’re being given the complete picture or just being told what we want to hear. Management’s messaging needs to be supported by clear actions and in the financial outcomes. We often ask ourselves: Does this make sense?

Thinking by inversion, another question we ask ourselves is: What are we not hearing? We can’t assume that just because something was true when we first looked at the business, it’s still true today. If management have stopped talking about something, it’s likely because it’s no longer as important to them.

4. Insights vs. information

Investing is more about insight and judgements than knowledge. Two investors armed with the same information could come to quite different conclusions.

Today’s investors have access to more data than ever, from real-time stock prices and financial news to social media. Paradoxically, this glut of information is more likely to cloud our judgement than to result in better investment outcomes. It can lead us to overestimate our understanding of a business, to sell an investment prematurely in response to negative press, or to become indecisive in a never-ending search for the next piece of marginal data.

Investors need to work out the few key issues that matter to the long-term prospects of a business, and what’s just noise.

At Aoris, we try to tune out the noise as much as possible. Managing a global equity portfolio out of Australia allows us to assess information and make decisions outside of the pressure of live market trading. We’ve chosen not to receive research from sell-side analysts, who often focus on the short term and exhibit herd mentality. We build our own financial models based on the company's source documents and we try to keep them as simple as possible.

Key takeaways

To make the best possible decisions, investors need to strike the right balance between these four investment paradoxes:

• Have confidence in our views as well as humility and a recognition we could be wrong.
• Be patient long-term owners of great businesses, while remaining vigilant for signs of weakness and acting with urgency once the facts change.
• Trust in the management teams of our portfolio companies while asking ourselves if what we’re hearing from them matches with what we expect.
• Focus on insights that matter most to the long-term prospects of a business, and manage the constant flow of information we’re exposed to.