We are delighted to announce our Horizon team has grown with the appointment of Randall Stout as a Senior Financial Adviser. Randall will be based in our Perth office and will regularly spend time in Bunbury. As our business continues to grow, adding an adviser of Randall’s experience and calibre was both necessary and timely. We also thank clients for the many warm introductions to our firm, which have contributed meaningfully to this growth.
Randall grew up in Bunbury, where his late father was instrumental in the design and construction of the Worsley Alumina refinery in Collie.
Randall has worked in financial services since 2000, beginning his career with the National Australia Bank. Over more than two decades, he has built, owned and led financial planning practices and brings a depth of experience shaped by both private practice and earlier work as a corporate accountant in the public sector and mining industry.
Randall’s contribution to the profession has been formally recognised, including being awarded the Financial Planning Association’s CFP Professional of the Year in 2014 and Fellow CFP status in 2015. He holds a Bachelor of Commerce from Curtin University.
As well as assisting with new clients joining our firm, Randall will also assist with the provision of bespoke financial planning advice as required from time to time by existing clients of the firm.
Horizon’s Guiding Investment Principles
To make this month’s investment letter a little different, we thought it would be worthwhile to revisit the core investment principles that guide how we invest client capital.
These principles have been shaped over an investment career spanning more than 28 years and multiple market cycles. They reflect not only the lessons learned from different investment environments, but also how investors — ourselves included — tend to behave when markets are calm, euphoric, or under stress.
We hope this provides reassurance that your portfolio is constructed and managed within a disciplined, repeatable framework rather than reacting to headlines, sentiment, or short-term market noise.
1. Have a clear investment philosophy and stick to it
While often easier said than done, our philosophy is simple:
Buy assets at a discount to their intrinsic (or real) value and sell them when they trade at a premium.
If an asset is worth $1 and can be purchased for 70 cents, we are effectively acquiring 30 cents of value for free – equivalent to buying the asset at a 43% discount to its intrinsic value. Endeavouring to find this margin of safety underpins everything we do.
2. Investment returns are driven by four variables – no more, no less
Despite the complexity that surrounds investing, future returns are ultimately determined by just four determinants:
• The current earnings multiple (known);
• The proportion of earnings paid out as income (known);
• The future growth rate of earnings (unknown); and
• The earnings multiple the market assigns to the asset in the future (unknown).
A significant amount of our time is spent analysing the two unknowns; earnings growth and future valuation across existing holdings and prospective investments. The attached Amcor, Sonic (examples of defensive companies) and Zip Co (an example of a high growth investment) research notes show how these four factors interact to provide a projected future return.
When seeking new investments to include in client portfolios, our goal is to endeavour to find blue chip investments that offer the potential to generate a return of at least 40% over an upcoming three-year period (12% per annum on an annualised basis).
3. Every investment must justify its risk-adjusted return
Potential returns must always be weighed against the risk of permanent capital loss.
A 50% loss requires a subsequent 100% gain just to return to break even. At a reasonable and realistic long-term return of 7% per annum, to recover one’s money from a significant (say) 50% loss takes roughly a decade. As such, capital lost is not easily replaced, and large drawdowns have a lasting adverse impact on long-term wealth creation.
This is why the potential upside must materially outweigh the potential downside. Likewise, because we don’t have a crystal ball, to avoid taking positions so significant such that, if an investment subsequently fails, it doesn’t result in a permanent loss of material capital.
4. Capital preservation matters but so does opportunity cost
Preserving capital does not mean avoiding risk altogether. Holding cash indefinitely guarantees one outcome: the erosion of purchasing power through inflation. Ultimately, this outcome is no different than losing money on a bad investment, it just occurs at a slower rate.
True risk is not just losing money; it is also failing to compound it to at least retain purchasing power.
5. The market is not the investment
Markets exist to facilitate transactions between buyers and sellers. Once an asset is purchased, the market is largely irrelevant until we choose to transact again.
Markets can and do behave irrationally, at times materially mispricing assets. These periods should be viewed as opportunities to exploit; not events to fear.
6. Remain consistent and take a long-term view
No strategy works all the time. Changing strategy when it is underperforming is often the worst time to do so.
Value is often recognised slowly. Assuming a great investment opportunity is ‘correctly’ identified, this does not mean the market will immediately agree. Patience is essential.
While we cannot control markets, and abnormalities in asset pricing by markets can exist for extended periods of time, ultimately, in the long-run assets do tend to be valued appropriately.
7. Be contrarian by design, not by accident
To quote Warren Buffett “Be fearful when others are greedy and greedy when others are fearful.”
Investors frequently pay a high price for the comfort of following the crowd and investing in the ‘momentum’ trade. Popularity is fleeting; what is fashionable today is often forgotten tomorrow.
Superior long-term outcomes are more often achieved by buying what is currently unpopular and selling once it becomes widely embraced.
8. Acknowledge bias and actively counter it
Everyone has biases. Ignoring them does not remove them.
Statements like “I’m a property investor” or “I’m a share investor” only narrow opportunity sets. Recognising personal biases and consciously challenging them is critical to objective decision-making.
9. Set buy and sell markers during calm periods
A useful investment tool we have adopted is to establish valuation markers during periods of normality so they can be relied upon when markets become disorderly.
Pre-defined price levels to buy and sell investments helps remove emotion from decision making and increase conviction when opportunities present themselves during periods of high market volatility.
10. A good investment is the one that will make money from here
Past performance—positive or negative—is largely irrelevant.
An investment that has risen strongly may offer little future return. Conversely, a poorly performing investment may represent genuine opportunity if fundamentals are improving.
What matters is not how an investment has performed, but how it is likely to perform from today.
11. Be prepared to reassess an investment with fresh eyes
Businesses, industries, and operating environments evolve. Valuations must evolve with them and having a flexible mindset is essential.
Every investment has a price that makes it attractive to purchase and a price that makes it unattractive to continue to hold.
12. Diversification is a risk-management tool, not a return drag
No matter how compelling an opportunity appears, certainty does not exist.
Excessively concentrated portfolios magnify both upside but more importantly downside risk; the latter can result in permanent loss of capital.
Critically, excessively concentrated portfolios also remove flexibility. They limit the ability to add during periods of asset price weakness and can force selling at precisely the wrong time.
Diversification preserves optionality that can allow more money to be made on a particular investment with less funds committed.
13. Build positions progressively
When acquiring an asset, buying at the low point of the trading range rarely occurs. Where it does, arguably luck is more relevant than skill. To maximise the chance of obtaining an overall favourable entry price into an investment, retain the ability to make multiple purchases.
Initial investment positions are typically sized at around 40–50% of what we are ultimately willing to invest in an asset, allowing scope to add over time and achieve a favourable overall entry price.
14. Always ensure adequate liquidity is maintained.
Maintaining the liquidity of some cash on hand allows us to fund obligations and take advantage of unexpected opportunities as well as smooth the overall volatility of a portfolio.
For retiree portfolios, cash is essential to avoid having to sell assets at potentially the wrong time at unfavourable prices to meet living expenses.
15. Focus on total return, not just income
Ignoring tax considerations, there is no difference between a 10% return from income and a 10% return from capital growth.
Income-producing investments provide cashflow certainty and patience, but growth assets remain essential. Our portfolios favour income but do not exclude lower-yielding investments where value exists.
16. Be a reluctant seller, but not a stubborn one
Liquidity is a key advantage of listed investments. Refusing to sell under any circumstances limits financial flexibility. Choosing to do nothing is still making an investment decision.
Conversely, selling investments simply because they have gone up before the potential of the underlying business has been realised is also a mistake. The saying ‘you can’t go broke making a profit’ is false. This can be achieved by selling your winners and holding your losers; a common mistake of inexperienced investors.
17. Independent thinking beats consensus investing
Investment committees often aim to minimise risk but frequently end up converging on the most conservative, least differentiated outcome. Consequently, consensus thinking rarely produces excess returns.
We consider that operating outside major financial centres has ultimately been an advantage. We have access to the same information as anyone else, but without the prevailing moods, narratives, and institutional biases that often dominate large investment organisations.
18. Keep ego firmly in check and be honest about outcomes
Investment markets provide an opportunity for investors (and investment advisors!) to look foolish daily. Even if we are correct with a particular view or theme, the market can take a counter view that can run for considerable periods of time.
History is littered with investment professionals that generated outperformance only to subsequently give it all back and more when the investment environment was no longer conducive to their way of operation. All too regularly, a few investors benefit but when the large inflows arrive on the back of past performance, it is the flood of new money that invariably suffers the subsequent poor returns.
Those that think they can stay one step ahead of investment markets are generally ignorant of the factors at play and are often in reality two steps behind. It is important to understand that knowing what you don’t know is often equally as important as knowing what you do.
We retain the simple view that we are as good as our last investment decision and we can answer every investment decision as endeavouring to ‘generate an acceptable risk adjusted rate of investment return giving due regard to adequate diversification’. We try to be investment agnostic, accepting that all forms and ways to invest can have the opportunity to shine.
Finally, it is essential to be honest as to the extent of investment performance being achieved. If we cannot accept or acknowledge an adverse situation or opt to sweep it under the carpet, how can we then take the necessary proactive action to endeavour to resolve the situation?
Closing thoughts
At the time of writing, Horizon manages $570 million on behalf of our clients. As a retail business that faces ‘Mum and Dad’ investors that has its origins in regional WA, this is not an insignificant sum of money. We are deeply grateful for the trust placed in our organisation and approach this responsibility with the seriousness it demands.
Many client relationships now extend into their third decade. Over such a long period, we have benefited greatly from the insight, experience and perspective our clients have generously shared. This collective wisdom has played a meaningful role in shaping us as individuals, advisers and Horizon as a firm. The experiences, including challenges and setbacks clients have entrusted and shared with us, has built a deep reservoir of knowledge, one that has proven invaluable when helping clients navigate the more difficult periods that inevitably arise over time, as well as our own inevitable trials and tribulations.
It is a privilege to continue this journey with our clients as we look to the years ahead. From an investment perspective, we view the future with confidence despite the many areas of uncertainty that presently exist in the world.
Please do not hesitate to contact our office if you would like to discuss any aspect of your investment portfolio.
