Investment fundamentals
Regardless of what’s happening in the market, investment fundamentals don’t change.
In this extract from keynote magazine, financial adviser Rod Scurrah speaks about what he learnt from the 1973 high inflation and OPEC oil crisis:
“I joined the industry on 27 November 1972,” said Rod Scurrah. “The Monday before Gough Whitlam was elected Prime Minister of Australia. That event brought a significant change to the financial landscape of Australia.”
In what was to become a challenging financial environment, Rod Scurrah began his career as a financial adviser in Hobart, a part of Australia he still calls home.
“In the early 1970s we saw high unemployment and high inflation, and people’s perspective of investing changed. I say investing, but it was really saving then,” he said. “As an industry, and a population, what we started to learn was to focus away from the short term and onto the long term.”
It’s inflation time
Under Whitlam’s rule, inflation skyrocketed to 14.5%.
This was further exacerbated by the OPEC oil crisis, where Arab oil producing nations protested against the US involvement in Israel by blocking supply. The scarcity led to massive increases in the price of petrol and heating oil.
“I can recall buying petrol in the late 60s at one and five, or 15 cents a gallon. When we had the high inflation, and the oil shortages, that price multiplied five times,” said Mr Scurrah. “Oil became a much higher percentage of the total cost of living, nothing like it is now. Wages were rising rapidly but they couldn’t keep up with the real cost of living.”
Further worsening this situation was the removal of tax exemptions on life insurance policies which, along with capital guaranteed products, had previously been used by families; similarly to the superannuation system of today.
This change meant many families saw little incentive to continue saving for their futures.
“People stopped putting into their policies because they were something they needed to get rid of to eat,” said Mr Scurrah. “I knew it was important for them to have protection for their future, and tried to get my clients to refocus on their original reasons for setting their policy in the first place.”
Over time, capital guaranteed products made way for today’s managed funds. These capable of producing greater returns, but influenced by the ups and downs of market fluctuations.
However, Mr Scurrah firmly believes that, even in turbulent markets, investors hold the key to achieving their goals.
“People always ask me, don’t you lie awake at night worrying about the stockmarket?’ The truth is, I lie awake at night worrying about people who are worrying about the stockmarket,” he said. “Bad markets don’t cause people to lose money. It’s bad investment decisions. Mistakes like cashing out when the market’s at its lowest.”
Keeping it simple
Over such a long period of time in the industry, Mr Scurrah has seen the evolution of many investment managers, products and strategies. In spite of this, he believes in sound fundamentals which don’t change much over time.
Those foundations are having a commitment to an investment strategy and practicing strong diversification.
“I’ve seen lots of clients who’ve lost money, and it’s generally because they’ve broken those two rules,” he said. “The people who really make money out of wise investing and saving generally live in the more ordinary areas and have rusty rooves,” he said. “They don’t have a Mercedes in the driveway, three swimming pools and five bedrooms. They are the everyday Australians, those who accept advice, take a strategy and stick to it.”
Having worked with clients through almost every market condition imaginable, Mr Scurrah’s observations offer rare insight into the vagaries of investing.
“I know this sounds very financial plannerish, but my biggest observation is that it’s crucial to take a long-term view of your money, to set a strategy for the long term and to stick to it,” he said.
Mr Scurrah’s best example of this principle at work is a couple he advised to invest in MLC’s Australian share fund in 1993.
“1994 saw quite a significant drop in share values, and my clients were really keen to pull their money out. My advice to them was, go back to why you did it in the first place. They said ‘We know, but we receive these quarterly reports, open the envelopes and get really nervous’. My answer was to stop opening the envelopes,” he said.
“I didn’t hear from them again for three years. The one day, they rang me up and said, ‘Can we open the envelopes?’”
While perhaps unorthodox, the clients’ approach of ignoring market noise and focusing on their long-term strategy meant when they finally opened their statement envelopes, they were pleasantly surprised to discover just how much their portfolio had grown by.
“Those same clients have still got that investment today,” said Mr Scurrah. “And it’s more than double what they started with, even with the downturn we’re going through today.”
Extract taken from keynote, issue 20, 2008
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