Why disagreements matter in investing
Why disagreements matter in investing
When it comes to building a resilient investment portfolio, it’s important to consider differences of opinion.
Take it from someone who learned this lesson over many years: Rob Prugue. Prugue came to Australia from Washington in 1989, when the superannuation guarantee was just round the corner. Almost immediately, he found himself in the business of determining which companies worked best from an investment perspective – a skill he took to his next role as head of international equities at State Super Financial Services.
What Prugue found interesting in these roles was that the same things you’d consider when buying a stock – who the management were, what you thought the company had vis a vis earnings potential – were very rarely applied to the investment businesses doing the buying. At the time, it struck him that the real distinguishing factor in any investor was the people around them.
This came into even starker focus during the Asian financial crisis, when Prugue found himself in an entirely different role, working as head of research at asset consulting firm van Eyk. “I never saw myself in asset consulting,” he says, “but all of a sudden I’d gone from coming from the point of view of manufacturing to focusing on the consumer.”
In searching for the “right” managers, he realised that the basic principles of funds management – picking good stocks, monitoring their profits and losses, identifying opportunities in the market, examining the management culture and so on – were more or less universal.
“But that’s just the prerequisite,” he continues. “That’s not what drives a good fund manager. A lot of managers ran by creating metrics of what defines good or bad in investments, but you’d be surprised by how few actually applied those same metrics to their own business.”
Not just “the best people”
It wasn’t just about the cliche – hiring “the best people” – it was also about those people’s willingness to challenge existing ideas (including his own) both when buying new companies and selling ones that were already in the portfolio.
Because of this, Prugue doesn’t buy the idea of “key person risk” in investing – in other words, the belief that the success of any investment is determined by one star stock-picker. Instead, he would study the culture and the personal dynamics within the firm.
“The reality is,” Prugue says, “what makes a ‘great fund manager’ is getting it right 55% of the time. I don’t know about you, but I wouldn’t want a surgeon who lost 45% of their patients or a lawyer who lost 45% of their cases. So if that’s the case – if even the best managers get it wrong – providing a good service to investors can never come down to a single individual. It’s based on a team; complementing crew sets and people willing to ask, ‘Have you considered this instead?’”
He believes these principles can apply to any business, and serve as a warning to any company that tries to succeed by investing all of its cultural and intellectual capital in one person.
“You have to be humble about these things,” he says. “I’ve had the privilege of travelling all over the world, both as a young lad and then later as part of my career. And of all the beautiful places I’ve visited in the world, not once have I come across a statue of a fund manager.”
How can you apply this to your own investing? Well, it’s important to remember that any good bet is always going to be coloured by your own opinions and biases, and sounding off against a trusted partner or two – your financial adviser, say – is likely to give you a much clearer view of the path forward.
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