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Reflections of an economist: Oliver shares 40 years of wisdom

By Jessica Penny
6 minute read

AMP’s Shane Oliver has shared nine crucial lessons he has learnt over a period of four decades.

The last 40 years have been riddled with crises – from the 90s local recession to the tech boom and subsequent “tech wreck”, the far-reaching global financial crisis and, more recently, a pandemic.

Despite each of these being labelled “unprecedented”, chief economist Shane Oliver maintains that investing principles remain remarkably consistent.

“But the more things change, the more they stay the same. And this is particularly true in investing,” he said.


In a recent market note, Oliver unveiled the key lessons he has learnt over the span of four decades, including that there is always a cycle and that it pays to be optimistic, among other things.

Below we bring you a summary of Oliver’s top nine lessons.

There is always a cycle

Oliver reflected on how financial markets consistently cycle through phases of prosperity and decline. Some, like the three-to-five-year business cycle, are shorter-term, while others span decades.

“Debate is endless about what drives cycles. But all eventually contain the seeds of their own reversal and often set us up for the next one with its own crisis, often just when we think the cycle is over,” he said.

As such, he emphasised that there is no such thing as a new normal or a new paradigm as all things eventually revert.

The crowd gets it wrong (at extremes)

While fundamentals may be at the core of cyclical swings in markets, they are often magnified by investor psychology if enough people suffer from the same irrational biases at the same time, according to the economist.

“From this, it follows that what the investor crowd is doing is often not good for you to do too. We often feel safest when investing in an asset when neighbours and friends are doing the same and media commentary is reinforcing the message that it’s the right thing to do,” Oliver said.

He added that this “safety in numbers” approach is frequently misguided. When everyone is bullish, there are few buyers left, but many potential sellers, Oliver added.

What you pay for an investment matters a lot

The cheaper you buy an asset, the higher its return potential, according to the chief economist.

“Guides to this are price to earnings ratios for shares (the lower the better) and yields, ie, the ratio of dividends, rents or interest to the value of the asset (the higher the better). Flowing from this, it follows that yesterday’s winners are often tomorrow’s losers – as they get overvalued and over loved,” Oliver said.

“But many find it easier to buy after shares have had a strong run because confidence is high and sell when they have had a big fall because confidence is low.”

It’s hard to get markets right

Referencing JK Galbraith’s observation regarding the existence of two kinds of forecasters – “those who don’t know, and those who don’t know they don’t know” – Oliver opined that no investor has a perfect crystal ball.

“Usually the grander the forecast – calls for “great booms” or “great crashes” – the greater the need for scepticism as such calls invariably get the timing wrong,” he said.

“Market prognosticators suffer from the same psychological biases as everyone. If getting markets right were easy, prognosticators would be mega rich and would have stopped long ago.”

Oliver warned that the world is getting noisier with the rise of social media, making it more challenging for both every day and professional investors. For most, focusing on long-term trends is more effective, he shared.

Investment markets don’t learn

Highlighting a quote by German philosopher Georg Hegel, who said, “The one thing that we learn from history is that we learn nothing from history”, Oliver said investors often repeat mistakes as markets lurch from one extreme to another.

“Sure, the details change but the pattern doesn’t,” he said.

“Sure, individuals learn and the bigger the blow-up, the longer the learning lasts. But there’s always a fresh stream of new investors so, in time, collective memory dims.”

Compound interest is like magic when applied to investments

“Based on market indices and the reinvestment of any income flows and excluding the impact of fees and taxes, one dollar invested in Australian cash in 1900 would today be worth around $259 and if it had been invested in bonds, it would be worth $924, but if it was allocated to shares, it would be worth around $879,921,” Oliver said.

He noted that although the average annual return on Australian shares (11.6 per cent pa) is just double that on Australian bonds (5.6 per cent pa) over the last 124 years, “the magic of compounding higher returns leads to a substantially higher balance over long periods”.

“Yes, there were lots of rough periods along the way for shares, but the impact of compounding returns on wealth at a higher long-term return is huge over long periods.

“The same applies to other growth-related assets such as property. So, to grow your wealth, you need to have a decent exposure to growth assets.”

It pays to be optimistic

In a nod to Benjamin Graham, who observed that to be an investor, you must “be a believer in a better tomorrow”, Oliver said “getting too hung up worrying about the two or three years in 10 that the market will fall risks missing out on the seven or eight years when it rises”.

Keep it simple

Noting people’s knack for “overcomplicating” investing, Oliver said this has been compounded by more options, information, apps and platforms, opportunities for gearing, products, more rules and regulations.

“But when we overcomplicate things, we can’t see the wood for the trees,” he said.

“So, it’s best to keep it simple, don’t fret the small stuff, keep the gearing manageable and don’t invest in products you don’t understand.”

You need to know yourself to be a good investor.

Smart investors manage their psychological weaknesses by understanding their own tendencies and reactions, according to the economist. As such, taking a long-term approach and being clear about your investment goals is essential.

“It’s also about knowing how you would react if your investment just dropped 20 per cent in value,” Oliver suggested.

Alternatively, investors should consider a more stable investment strategy that may offer lower returns but aligns better with their risk tolerance, he concluded.