Economist Shane Oliver's advice for investors: follow these simple rules for optimum results

AMP chief economist and head of investment strategy, Dr Shane Oliver has amassed vast knowledge over four decades in the financial field, yet his key tips for average investors centre around keeping things very simple. Create a long-term plan and stick to it. Invest in a mix of high-quality assets including bonds, shares and property. Don’t follow the crowd. Use the magic of compounding by reinvesting your returns. Don’t invest in products or companies you don’t understand. And maintain an optimistic view.

“We have a knack for overcomplicating investing,” Dr Oliver says.

Buying quality assets at good prices (determined by looking for low price-to-earnings ratios and high dividend yields with shares) and holding for the long term is a simple approach that works, Dr Oliver says.

“The cheaper you buy an asset the higher its return potential. Flowing from this it follows that yesterday’s winners are often tomorrow’s losers – as they get overvalued and over-loved.”

Diversifying investments is crucial. Lower-risk assets like cash and bonds give investors comfort but lower returns. So, growth assets have to be in the mix. He also notes that compounding interest “is key to growing wealth”. Dr Oliver says a dollar invested in Australian cash in 1900, with interest earnings reinvested, would be worth about $259 today. If it was invested in shares, with dividends reinvested, it would be worth $879,921.

“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.”

Fear stops many investors from even getting started, and fear can drive panic in financial markets when economic crises inevitably occur. “Much has happened over the last 40 years with each new crisis invariably labelled ‘unparalleled’ and a ‘defining event’ …” Dr Oliver says.

He’s witnessed the 1987 crash, the recession Australia “had to have” in the early 1990s; the tech wreck in 2000; the GFC in 2007/2008; and the pandemic. Despite such events, ASX shares have delivered positive returns in roughly eight out of 10 years since 1900.

“So, 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.”

When it comes to investor psychology, Dr Oliver puts it plainly: people can get irrational. This causes many stocks to rise well beyond what they are fundamentally worth. Dr Oliver says investors tend to look for evidence that confirms their views (‘confirmation bias’), become overconfident when influenced by ‘the crowd’, and have a lower tolerance for losses than gains.

“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,” he says. “This ‘safety in numbers’ approach is often doomed to failure. The problem is that when everyone is bullish and has bought into an asset there is no one left to buy but lots of people who can sell on bad news.”

Dr Oliver says investors need to know themselves and manage any psychological weaknesses.

“It’s also about knowing how you would react if your investment just dropped 20% in value,” he says. “If your reaction were to be to want to get out, then you will either have to find a way to avoid that as you would just be selling low and locking in a loss or if you can’t then you may have to consider an investment strategy offering greater stability over time and accept lower potential returns.”

Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)

The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.

It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.

Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.

Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.

Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.

With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.

Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.

New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.

“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.

He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.

If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.

Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.

Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.

Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.

There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.

Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.

It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.

Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.

Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.

Economist Shane Oliver’s advice for investors: follow these simple rules for optimum results

After more than 40 years observing and commenting on the Australian economy, Dr Oliver says there’s a key pathway to growing wealth when investing in shares

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