What investing insights would you give your 20-year-old self?

We pulled together Australia's top investing experts to answer the question:

“What investment insights would you give your 20-year-old self if you could go back in time?”

Each person was given 200 words but with a high degree of freedom. We want to retain the author's own voice so we have not edited the contributions. They are often personal and reflective, and many told us it was difficult to identify only two points from decades of investing experience.

Below is an excerpt from the full article which can be found here. 

Hamish Douglass, Chief Executive Officer and Chief Investment Officer, Magellan Asset Management

1. My central advice would be that successful investing is about finding and then owning for the long-term companies that can generate excess returns for years to come. It’s not about looking for stocks that might come into short-term favour on stock markets. The worthwhile companies to own for the long term will generally possess some form of Warren Buffett’s fabled ‘economic moat’. This term is how Buffett describes a company’s sustainable advantage over competitors that enable it to earn superior returns that are well above the cost of capital. The pick of these high-quality companies can expand their businesses in the same profitable fashion. An underplayed aspect to owning quality stocks is a willingness to let compound returns work their charm over time. Even a return on capital that is just a few percentage points higher than that delivered by competitors will create vastly more shareholder value as years go by.

2. Beware of turnarounds. Often when companies appear to have resurrected their fortunes they are only enjoying some short-term benefit that won’t last. The best way to avoid turnarounds that are duds is to stay focussed on finding high-quality companies.

Shane Oliver, Chief Economist and Head of Investment Strategy, AMP Capital

1. Make the most of the power of compound interest

When you are young you have lots of time on your side to look through short-term setbacks in markets and get the benefit of the way investing returns compound on top of each other in an almost magical fashion over long periods. But investing in bank deposits and bonds won’t make the most of this because they don’t grow with the economy in the same way that growth assets like shares and property do. For example, over the last 40 years – which covers a period that saw high inflation and low inflation, strong growth and recession and numerous crises – $1000 invested in Australian shares would today be worth $116,000 whereas if it was invested in bonds it would only be worth $36,000 and in cash only $25,000.

2. Turn down the noise

Over your investing and working life, there will be lots of ups and downs: economic booms and busts, financial market bubbles and crashes, periods of higher interest rates and periods of low rates. The key is to avoid jumping at these swings and getting blown off course. The best way to do this is to turn down the information noise you will be subjected to in the decades ahead as much of this will be aimed at making your worst fears worse. If anything try and do the opposite to the crowd. As the well-known investor Warren Buffett once said: “Be fearful when others are greedy and greedy when others are fearful.

Chris Stott, Chief Investment Officer, Wilson Asset Management

1. Look through the ‘noise’

When investing in shares, do not be distracted by the noise in the market about a company. Rather, take a medium to long-term view of the business based on its fundamentals.

The only exception is when you can use the noise to your advantage. For example, if the noise leads to a short-term fall in a company’s share price, it can be used as an opportunity to buy more stock.

2. Don’t invest if you don’t understand

If you cannot understand a company or reconcile its accounts, then do not invest in it. Only invest if you can fully grasp how the company makes money.

Put another way, and to paraphrase legendary investor and fund manager, Peter Lynch, if you’re willing to invest in a company then you should be able to explain it to a fifth grader. For example, it took a significant amount of time to understand in full the mechanics of Babcock and Brown and its various satellite companies.

This critical rule of successful investing was drummed into me when I started at Wilson Asset Management and is one I continue to apply to every investment decision.

Roger Montgomery, Chairman and Chief Investment Officer, Montgomery Investment Management

Dear Roger,

There are two key ingredients to successful investing. The first is reasonable intelligence that should be backed by some business ownership experience (be sure to get plenty), and the second is patience. Most of the time there will be little activity required so you can spend your days understanding how businesses vary in their ability to reinvest capital at various rates of return, remembering that higher is always better. Read prodigiously, always. Also spend time thinking about how different industries’ competitive landscapes have changed and will change.

Once you have identified a high quality business with superior long-run prospects buy it on the assumption that you will never need to sell it. You can be rich buying and selling but you’ll be wealthy buying and owning. Own a great quality company’s share the way you might own farmland inherited from your great grandparents – every day the crazy neighbour will shout over the fence a price at which he’s willing to buy your farm and a price at which he’s willing to sell you his. Be sure to always have some cash and simply wait until he’s deeply depressed and despondent and willing to sell you his at a very cheap price. Then buy. The rest of the time there won’t be much to do, in fact the really obvious investments will only be presented half a dozen times each decade.

Oh, and be sure to marry someone who loves the Lord and naturally delights all those around her. Support each other’s hopes and aspirations and build a sense of purpose into your lives together by working, to get, to give.

Phillip Ruthven, Founder, IBISWorld Pty Ltd

1. I think you should know that there are a number of what are called classes of investment:

• Shares in listed companies
• Dwellings (that you live in)
• Property that you rent out (commercial & residential) or Property Trusts
• Government Bonds
• Cash (short term deposits)
• Collectibles (art, stamps etc)
• Precious metals (gold, silver, gems etc)

It is rare for any of the above to be the best investment year after year: they take it in turns, some rarely. But over the long term, Phil, since you could live to 100 in this 20th Century, shares will do best as they are the only active investment. All the others are passive (albeit tradeable and exploitable as a day-trader if you have the time and inclination). So you could do worse than keep buying shares, sleep nights, and retire very wealthy, especially if you also take advantage of superannuation fund tax benefits.

And, if or when you marry, it would be better to rent (preferably lease on 5 or 10 year periods) where you want to live and invest in dwellings where you don’t want to live, to get the best of both worlds.

2. Consider the wisdom of Lesley Parker, who I have never met, but sounds a bit like Warren Buffett.

The Holy Writ of Investment

The 10 Commandments of Investments, so to speak:

1. Remember the link between risk and return; keep it holy.
2. Thou shalt remember that leverage is a double-edged sword.
3. Thou shalt diversify. The ‘all the eggs in one basket’ risk.
4. Honour thy asset allocation; don’t chase the ‘next big thing’.
5. Thou shalt not invest in anything thou doth not understand.
6. Thou shalt not buy tree investments. Money does not grow on trees.
7. Thou shalt pay heed to fees and taxes. Some are too high.
8. Thou shalt discern an adviser from a salesperson.
9. Thou shalt not worship false gods. Remember Madoff (Ponzi scheme).
10. Thou shalt not expect bull runs, nor bear markets, to last forever.

Source: Lesley Parker, SMH Money 29 July 2009

Graham Hand, Co-founder and Managing Editor, Cuffelinks

Graham, my boy, you will be amazed over the next few decades at the incredible changes in the world, especially in technology, but how little progress will be made in investment management. The financial rewards will attract the best and brightest people in the world, but the majority of funds will struggle to outperform their benchmarks. Risk management will be little better as markets will respond to daily noise and go through bouts of massive volatility. You will realise how little we really understand about investor behaviour and investment markets.

My two pieces of advice are:

First, learn to manage your emotional reactions to markets. Don’t sell when the market falls heavily, as it will eventually recover. These are the best buying times, although you will struggle to recognise them at the time. Don’t be tempted to buy many different stock ideas from fear of missing out, as your portfolio will end up looking like a zoo. The best way to manage your reactions is to diversify your portfolio into unlisted or alternative investments, including bonds, infrastructure, property and private equity. Take the daily market fluctuations out of the picture.

Second, play to your own strengths. You will not have enough patience or interest to pore over company balance sheets analysing numbers, nor special intuition about future global trends, to become a top share analyst. Most macroeconomic commentary bores you. Don’t think you will become a leading stock picker because you’re no smarter than hundreds of others. You don’t have the right temperament to be a fund manager because you worry too much about losing money for other people. For your equity portfolio, you should combine three opportunities:

1. Identify a group of high quality active investment managers who do not follow any indexes, and leave your money with them for long periods.

2. Build a core of direct investments in great companies you are happy to hold for many years.

3. The rest of your listed equity exposure should be in various forms of indexes but avoid repeating your own selections in the concentrated Australian market.

And train harder and play more football, because you will never be as fast and fit again as you are today.

Chris Cuffe, Co-founder of Cuffelinks, Portfolio Manager of Third Link Growth Fund

I have previously written an article in Cuffelinks called My 10 biggest investment management lessons. From that I have selected two below. Note that unlike many investors, I am comfortable selecting some experienced managers to help manage my money, as well as doing stock selection myself. In financial services, with most aspects of investing, Joe Average does not have a clue where to start to find the best products. To DIY in financial services is tough for the average person. I can DIY in my back yard by going to the hardware store, working out how to pave a path or tile a wall, but you can’t do that easily in financial services.

1. Past performance is the best guide to future success

Every offer document in the country says something like ‘Past performance is no guide to future performance’ or similar. That is exactly the opposite of how I think. It’s the best guide to knowing what a manager is really like over a long period. Past performance is extremely important and a great guide to the future. Only long-term results are relevant. The managers I use are selected for the long term. I have no interest in their short-term results. If it looks like a manager is struggling (which I would only conclude after rolling 3-year periods), I would only exit after say a poor rolling five-year result.

2. Never buy a bad stock because the price is low

I don’t like ‘deep value’ investing where a manager is willing to buy a poor quality stock because the price is so cheap. I don’t like people saying a bad stock priced cheap is low risk. Managers need to buy quality stocks. A good track record and a high tracking error should help investors do well in falling markets which is a sign of a good portfolio.

Read the full edition of this article on cuffelinks.com.au