3 financial life lessons from one of Australia's best investors
"If everyone is talking about what a great investment it is, chances are you’re paying too much for it."
As one of Australia's most successful private share investors, Tony Kynaston, host of the QAV Investing podcast, has made a return on his share portfolio which rivals Warren Buffet.
He has achieved an 18.5 per cent compound average annual return on his share portfolio over 25 years - Warren Buffett averages about 19.7 per cent.
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As any financially illiterate 22-year-old would do, I sat down with Tony and asked him if he has any “monetary life lessons” to impart to my generation.
These are his top three tips.
1. No time like today, except yesterday
“As someone who has been investing seriously for over 30 years, my only regret is that I didn't start earlier. The power of compounding is amazing when you really get your head around it,” Tony said.
Compound interest sounds a little threatening and like you might need a finance degree to understand, however, it’s quite simple.
If you’re a 20-year-old and are able to invest just $800 per month into a stable index fund returning 10 per cent, by the time you hit retirement age (60), you will have amassed more than $4 million.
“The crazy part of this is you would have only invested $380,000 in regular deposits over that 40 years, but the interest gained would be 10 times that,” he said.
Warren Buffett, one of the world’s most successful investors, explains compounding using the metaphor of a snowball rolling down a very large hill.
“I most certainly made mistakes when I started Investing,” Tony said. “Starting early also gives you the opportunity to learn from these mistakes and develop a successful strategy when the value of your investments is still quite small.”
2. Buy a house and pay it off ASAP
Tony said that by purchasing property early in your life, you not only benefit from the power of compounding in real estate, but you can also leverage your home equity into other investments, supercharging your portfolio.
“During the 2008 Global Financial Crisis, I was able to refinance the equity in my home and invest those funds into the stock market. By increasing the amount of capital I had in my investment portfolio when the market was at a low point, I was able to get super-sized returns over the next few years as the market recovered.”
While you can’t forecast the bad times, you can turn them to your advantage if you have set yourself up properly beforehand.
He said that another benefit of borrowing against the equity in your home, and investing it wisely, is that the dividends from your shares can end up funding the interest payments on the loan, making it essentially free capital.
3. Things that are cool tend to not be profitable long term
Tony warned that in investing and in life, doing ‘cool things’ often comes with some serious downsides.
“It’s very alluring when you are young to get involved in industries that seem cool from the outside,” Tony said. “One problem with this approach to finding a career, is that if the industry seems cool to you, then it probably does to a lot of other people your age, and that leads to a lot of competition for the same roles.”
“One example is the fashion industry, where there are always plenty of young people who are willing to work for peanuts. Similar things can be said about wanting to be a social media influencer, sportsperson, or an actor.
“Out of the millions of people trying to make a living in those industries, an extremely small percentage make it, but most waste years of their lives getting nowhere,” he said.
“I remember the CEO of a garbage collection company who said that she loved the industry because it had to pay attractive wages and there was always your pick of jobs.”
“By the way, the same rule applies to investing in boom stocks and crypto. If an investment seems cool and trendy, I stay away from it. It usually means it is overhyped and overvalued. If everyone is talking about what a great investment it is, chances are you’re paying too much for it. Again, I’d take Warren Buffett’s advice to buy stocks that have a good history of generating cash and are so boring that nobody is paying them much attention, so you can buy them at a discount.”