Neil Woodford might have mis-managed his funds.
But first and foremost, Woodford investors have lost money through making bad investment choices.
It would have been different, for example, if there had been fraud – something on no one’s radar. But there wasn’t.
The point is that there was enough publicly available information to have avoided the funds at launch, particularly Woodford Equity Income, the big one in 2014. Subsequent poor performance was what is called a predictable surprise.
Lots more news broke in 2017 about both poor performance, big institutions bailing out, and a growing liquidity problem. That the fund might eventually have to be suspended was also a predictable surprise.
A “predictable surprise” means that we have enough information to take evasive action, but do not do so. Why?
What stops us seeing, and acting upon, “predictable surprises”?
A few years ago James Montier
[external link] identified five barriers, which feel even more fresh today in the wake of the Woodford debacle, and all of us should re-visit them, as I will now.
Over-optimism. Put simply, few are good at looking out for bad news, particularly investors. Sadly, as has been researched on a number of occasions, “the one group of people who see the world the way it really is are the clinically depressed”. James says this is the most common problem he comes across. People tend to exaggerate their own abilities, or just kid themselves that “It will be alright on the night”. Have you held on to a losing investment and told yourself “it will be OK if I just hang on”? And then it just becomes a running sore in your portfolio – every time you look at your portfolio valuation you are reminded – an ugly reminder that you got it wrong.
Illusion of control. Many people have the bizarre belief (not always overt) that they have influence over the outcome of uncontrollable events (and that even if something goes wrong, they will somehow be able to sort it out). Perhaps the best example is that people prefer to pick their own lottery numbers rather than to have others pick for them. In fact, people will pay four and a half times more for a lottery ticket that contains the numbers they choose!
Myopia. Too many obsess about (profits) today, and find it exceptionally hard to focus on the longer term. Dopamine is a neurotransmitter, one of those chemicals that is responsible for transmitting signals in between the nerve cells (neurons) of the brain. Above all it is a “happy” chemical, it gives us pleasure and makes us feel good – but it also encourages impulsive behaviour. Studies have shown that anticipating profits today releases dopamine - the possibility of longer-term profits just doesn’t cut it.
. We are bad at seeing things we aren’t looking for and, more importantly, struggle to think about or focus on more than one thing at a time. Try this test
[external link] – it’s fun. (It also means that multi-tasking is a myth – whatever your gender! I will be home at the usual time dear…)
. This isn’t so much a problem for individual investors, but a severe handicap for the investment industry, on which see The Dirty Fund Industry Secret - The Illusion Of Skill
. In a nutshell, investment professionals have a very strong bias to over-weighting their experience against the (objective) statistics, and believe in fairies and perpetual bull markets. Investors inclined to heavily weight the views of sunny investment “experts” should always be wary.
Last but not least, a quick reminder:
- Fund managers don’t lose you money.
- Bad choices lose you money.
- No good plan loses you money.
- Ignoring the facts loses you money.
- Turning a blind eye to the weight of evidence loses you money.
Next week there will be a check-list, so that you can identify which of these unhelpful tendencies is likely to undermine your investment success. We all have some such biases, there are no exceptions – we just need to acknowledge them, and then build a solution into our plan.