We could all be better at investing

As a debt guy I have never really had to think about “what’s next” because I know the next event is the borrower repays. In the investment grade space that almost invariably occurs. For non Investment Grade debt a default is more of a chance but still has a low likelihood. Once repaid we redeploy to someone else who will pay us back at the next maturity.

Because my day job is one of simplicity, I struggle with my equity strategy. I am a macro guy and at the moment I am positioned for a commodity super cycle which is looking a bit more like a three wheel dinky compared to my hopes. What should I do next? I think the answer could be to work harder and keep earning income and have faith in the longer term outlook and don’t need to sell those underperformers for cashflow, but there must be better options as well.

Emily Mohan has just joined us and she is an equity person who knows what she is doing. She points out that a commodity super cycle view and an investment in an equity are completely different animals. The set and forget structure is what the whole of the retirement savings pool has grown up on. We have talked to the point of boring our readers and ourselves about the traditional asset mix. It never seems to really adjust to our own “what next” and at best we tinker around the edges.

Emily points out that the real value proposition of any equity has to be that it represents a cashflow potential that is there to be unwrapped. Otherwise it is just a long dated bond. Bringing an idea from a Newtonian moment of an apple hitting you on the head to that stabilised bond-like cashflow has some pretty clear steps. My dopey call about commodities remaining scarce doesn’t really fit that bill. Like a 70:30 asset allocation split it is all about things that are beyond the control of the various managements of the companies involved. There are more fruitful alternative strategies to be had.

Investing in early stage businesses is like Newton rubbing his head. You know something momentous could just have been discovered but the trick is to build on the apple dropping and turn it into something. Taking an idea and building the ability to execute can generate more value than most other investments. It is the core of capitalism, generating better outcomes through innovation rather than just being swept along in the tide.

The significant challenges in what’s next for early stage equity can still be mitigated, and working with founder led management is a good start. Every early stage investor needs to be aligned to management and there are so many tales of new businesses paying top dollar for so called experts whose coin toss decisions don’t get in the way of their pay packet but can destroy shareholder value.

Monetising a great idea also doesn’t involve hanging on forever hoping the pricing will come good (unlike my lame strategy). Clear plans for liquidity points when the risk premium available to early stage investors has transcended into a higher price for stabilised cashflows needs to also offer a way out. The only way my dad was ever selling Oil Search, which he bought in the 80s, was Santos giving him no choice. Making a decision for 20 or 30 years is what most of us do but we are never going to shoot the lights out with that approach.

So thank goodness Emily is here. I need an expert to give me a swift clip around the ears but more than that show how the “what’s next” in an asset class I know I am not skilled at can be harnessed. I will make better decisions and keep these new styles of investing alongside what I already know. In the credit fund I manage I don’t rely on the tide raising all boats but some of my personal strategies do. Time for the old dog to listen to the experts and learn more new tricks.