A real lesson for investing is that for it to work, the process is pretty boring. You must be prepared to sit and wait for things to play out.
Our brains are naturally wired to avoid pain and seek pleasure. When there is so much information available to us, there is often a blur between truth and manipulation. Ultimately, we are often manipulated to desire things or have a certain point of view, whether it’s an advert for an aspirational item or a political/social comment. Everything has self-interest connected to it.
The explosion of the internet and the ability to consume information at a much faster rate has massive benefits. I love the fact that when I want to find something I can “Google” it and there it is, with various sources available to research.
Going back to our complicated brain system, we often seek affirmation that our beliefs are correct. This validation is central to how we think. For this reason, people will turn to certain media because they know that it is more likely to reinforce their beliefs, whether this is the Mail, the Guardian, and recently Facebook or Google. What people read is often held up as true, but it is usually biased.
In politics, Momentum (who are behind Labour) used targeted social media to great effect, giving people validation of their own beliefs. Trump does the same as does Emmanuel Macron. This is dangerous however, because often there are shaky foundations (or none at all!) in what they say and can be derisive of opposing views.
So, what does this have to do with investing?
A lesson to the past
I am sure I have said this in the past, but it is very easy to be sucked into the hype. In 1999 if you had held technology stocks you would have done very well. In fact, all the stories were about how amazing these investments were, what happened next seems obvious now; more money went in, and then bang everything came tumbling down.
For a short period, I allowed myself to get sucked into buying directly into shares; if you read the good investors it is easy to do. You do the research, you check the price and then you invest. The problem with shares is that they can move very quickly in relatively short periods of time and therefore they are not for the faint hearted.
I have used these examples in the past, but they are useful to demonstrate certain behaviours employed when investing. I purchased Amazon shares, and these rose 40%, and Bank of America shares which rose about 20%. I sold both, happy to take profits and re-invest into other shares. Another share I purchased was Lloyds, I started buying at about 30p and kept buying as the shares rose to over 80p. This was on the basis that I thought the shares would rise to £1 (or hoped they would). Gradually Lloyds shares dropped back, and I think I ended up selling them at around 60p, and because I had been buying on the way up my investment was flat. My favourite story was Boohoo; purchased at about 70p, and it collapsed to 23p. I sold out at this point, and now the shares are £2 plus.
The point of telling my stories is this; it is very easy when values rise to think you are a genius and that you can always repeat this. With Lloyds I shouldn’t have kept buying and should have sold out, perhaps when I had doubled my money. With Boohoo I knew it was a good company, I just couldn’t cope with the pain of a perceived loss (which it wasn’t until I sold it!).
And this is the reality for a lot of investors.
Process, process, process
A real lesson for investing is that for it to work, the process is pretty boring. You must be prepared to sit and wait for things to play out. I have written about whether investing is like gambling, and if you are chasing the next big thing then yes, it could be. But if you are prepared to sit it out then I would argue it is not.
We can work-out logically what the drivers of the future could well be; biotechnology, developing markets etc. But what we don’t know is the timing and this is key to any process.
In 2016/2017 if we were invested in Emerging Markets and Asia we would have done well. 2018 seems to be about investing in the US, with 2019 we can only guess but it could be the UK (this appears to be the most hated market now). We have a choice of guessing where returns may originate or we can apply some very simple rules.
The first of these is about diversifying investments; spreading investments across regions and asset classes. We are long term investors and we know that different sectors and regions perform at different times and speeds, and therefore diversification (incorporating negative correlation) is a proven method for long-term investors. We are not taking bets or looking for short-term wins, we are seeking to get the best risk-adjusted terms over the long-term (so effectively reducing the potential concentration risk of betting on one region or asset class).
The second rule is rebalancing. There are many arguments as to how often you do this, but we feel once a year is sufficient. The aim is to remove the bias that occurs from holding onto the winners; re-balancing means taking profits from these outperformers and buying more of the losers. It sounds counter-intuitive but evidence shows over time this approach eliminates behavioural bias to deliver a consistent approach to investing.
The chosen one
When we meet fund managers, those that have done well can be quick to tell us how good they are. Some see themselves as “the chosen one”. They then tell us about the awards they have, the top quartile performance etc etc. Humility is a precious commodity and looking for those managers with these traits is key for us in seeking good long-term investors.
Going back to my earlier example when the shares rose in value, it was easy for me to think I was a genius. Ultimately this hubris was my downfall and something I have learnt from. When it comes to investing for clients we take the good years in grace, but we know there will be tougher times.
The returns we deliver over the long-term are down to our consistent process and the work we do around that. We feel the pain in hard times and share the joy in good times, but ultimately if we can deliver on clients’ goals then this is our main aim.
We are not “the chosen ones”; we follow and stick to a process. The ultimate win in investing is not about taking bets and winning, because you often lose more times than you win, but slow and steady compounding of returns.
All about the goal
When we have money, we can become polarised in thinking that everything is about the money we have. If that money is higher than the previous year, then we are happy. If it is down we can feel sad, anxious or worried.
It comes back to the simple message of the entry and exit points of our investment. If we look at it in that way, in most cases over the long-term our investments will be higher than when we made them.
The investments are only part of the puzzle. One of the reasons why we panic when markets fall is that we can lose sight of what the investment is for. As an example, I am 49 (hard to believe I know) and the reality is that I might not retire for 20 years. What happens between now and when I retire is irrelevant, if the fund in twenty years is valued higher than when I started out then I’ll be happy. But when I do retire does anything really change? It is likely I could live for 20 more years in retirement (or longer) so I will need that money to work for me during retirement. My focus will be on both the investments themselves as well as what the funds will give me in my later years.
If there is a bear market and investments fall it would be part of a cycle and this will recover. My timescales are 40 years plus; I can ride out the cycle. For this reason, one of the key things we try and understand from clients is what their goals are for their money and when they anticipate using it (if at all) and then making plans around that.
We started by saying that our brains are wired to feel pleasure and pain, and that we seek out information/opinions that confirm our biases. This can be less useful in general, but especially when it comes to investing.
If we want to gamble then we should only do so with money that we are prepared to lose. If we are not prepared to lose money but want to increase values using risk as a tool and following a strict process, this is the most effective way of investing.
There will be times when the waters are choppy (and investments go down) but small incremental increases, compounding over time will deliver growth to the original investments. The key is to avoid the noise and remember that most of the things we read or hear exist to influence us to think a certain way, and fear is the greatest weapon when it comes this!
Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.