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19 bad habits costing you fortunes (part II)

Posted by: Brian Dennehy
Membership level: Free
 
We all get into habits in life, and mostly they make us more efficient.  Sadly our investing habits are more likely to lose us lots of money.  But by honestly addressing them you can transform your investing success.
 
Part I of our list of the most common bad habits covered numbers 1-9.  Here we finish off with numbers 10-19. 
 
Remember, a little introspection can go a long way.  Hopefully you haven’t beaten yourself up too much with Part I. It’s a learning exercise, after all.  Let’s get into the final bad habits…
 
10.          Stop believing you must work harder to beat the market
 
In Part I, I referred to people who spent their lives solving complex problems and expect to have to do the same with their investing.
 
It is similar with those who simply worked blooming hard all of their lives – you assume that investing must be equally hard work.
 
So, if someone brings you a solution which DOES NOT involve hard work you tend to be sceptical.
 
This goes to the heart of whether you can generate more growth going forward:
 
·         You do NOT need to work harder
·         You DO need to work smarter
 
This doesn’t mean you have to have a big IQ. On the contrary as Warren Buffett said:
 
“once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble when investing”.
 
11.          Stop obsessing over short-term twitches
 
In the short-term there are those who obsess over whether a fund or their portfolio has beaten the index or cash or inflation over days or a few weeks, let alone in the context of 6 or 12 months valuations. Why?
 
·         Because you still have a get rich quick attitude
·         You didn’t buy with a sensible timescale in mind
·         You didn’t choose your investment based on a clear process, which will make you more confident
 
Those with a short-term focus will be frustrated and jump in and out of funds seeking a source of short-term profits which simply doesn’t exist.
 
You must manage your expectations. 
 
This means having a process where there is clear evidence that over sensible investing horizons you should achieve better investing success.
 
Then you won’t stress too much about the short term, manage your expectations, feel more confident, and allow scope for pleasant surprises.
 
 
12.          Stop believing in efficient markets
 
Do you remember what the Queen said in the in wake of the Lehman collapse and near global depression?
 
“Why did nobody see it coming?”
 
This was far more forthright and public a comment than you would normally expect from the Queen – she was animated because it is reckoned she lost approximately £25 million of her personal fortune.
 
But why did nobody notice it coming?
 
A key problem was economists and a belief in what is called the “efficient market hypothesis”.
 
This tells us that all market players are rational, and therefore if we are all making rational investment decisions markets can’t be unstable.
 
It wasn’t just an academic problem.
 
As a result, people such as Alan Greenspan and Ben Bernanke (the most recent chairmen of the US Federal Reserve (the world’s most important and influential financial institution) proclaimed stability; they proclaimed stability which engendered greater confidence (as if the big players needed greater confidence!)
 
They proclaimed stability when there was clear evidence of instability but rather an impending crisis.
 
They failed to understand that the global economy was at grave risk, primarily due to an extraordinary debt bubble.
 
So, don’t for a minute believe that markets are rational and that you and I are rational – we are NOT.
 
But knowing this, we have a better understanding of how to profitably exploit market trends. More on this in coming weeks.
 
13.          Stop confusing economic growth with stock market potential
 
Most people believe, and it is natural to do so, that an economy which is obviously growing, and growing more than elsewhere, is a place where you should invest your money. 
 
Yet volumes of research inform us that it is wrong to do so. 
 
The Credit Suisse Investment Returns Yearbook 2014 went into great detail, crunching data from 1900 across 21 countries.
 
The conclusion is simple:
 
“Buying the equities of countries that have experienced the highest economic growth fails to give a superior return”.
 
During a large part of 2014 the media has proclaimed the Great British Recovery, and many extrapolated this to mean “therefore we should buy the UK stock market”. We, in contrast, suggested caution.
 
Knowing that strong economic growth today does not forecast strong stock market returns next year is VERY important – it will stop you getting sucked into the euphoria.
 
14.          Stop obsessing about market timing
 
If any of us could cherry pick and time with some accuracy, market tops and bottoms, it would be fantastic. 
 
But we can’t – no one has ever illustrated that they can do that consistently (though do let me know if you think otherwise).
 
When you listen to this we might be either plumbing depressing lows, or confidently scaling impressive peaks.
 
Let me assume markets are riding high, you are conservatively invested, and hoping to identify a big fall and then buy at much cheaper prices.
 
Now let’s assume that the stock market DOES fall very sharply, by 30-50%. Your expectations have been fulfilled. But there is a problem... 
 
Here I leave the floor to Wall Street trader Jared Dillian:

“one of the things I had learnt [in theory!] was that if you can time the bottom
exactly right you can make a hell of a lot of money in very short order.

I prayed for a bear market so I would get my chance”

Then in March 2009 he got his chance... and he blew it.
 
“When the market is down 60% it’s as scary as hell...
people thought it was going to zero.”
 
He missed out on what was, with the benefit of hindsight, an extraordinary opportunity.
 
This is where you need a develop a plan NOW as to HOW you will act when such falls occur – it is what you might call pre-commitment.
 
15.          Stop listening to “experts”
 
Yes I know that suggests not listening to me! 
 
The problem is that no one, no one, is more interested in your money than you. 
 
Again, the problem is how our brain works.
 
Psychologists have repeatedly found that we love people to sound confident.
 
In fact, we would rather pay more for confident (but inaccurate) advisers. With advances in neuro science psychologists have been able to observe that parts of the natural defences in our brain are switched off when we are told someone is an expert, particularly if they sound confident.
 
We need to learn to be far more sceptical of people presented as experts.
 
Once you have developed a deeper understanding of what it takes to be an outstanding investor, THEN you are in a position to sort out the wheat from the chaff of investment experts – you will be able to judge those which are on your side – those who are tuned in to your way of thinking.
 
16.          Stop reading the financial press and money pages
 
Some of the most successful investors of the 1920s sat alone in a darkened room and simply watched the ticker tape – even then there was the risk of information over load and distraction from newspapers, radios, broker reports, and opinionated colleagues and friends – successful investors understood that.
 
This is connected with “stop listening to experts”, but is more fundamental and is about people in positions of authority.
 
Over the years surveys of investors have told us that a significant number take their advice from newspapers. Now I KNOW that a good number of the journalists in the national press have fantastic experience of markets, and have access to the best possible sources. But they have two problems:
 
·         a business imperative
·         very limited space
 
Rather than giving you the benefit of all their sources, the quotations they provide are perhaps 10-20 words extracted from what might be a piece of research of 50 or 100 or even 200 pages.
 
You might see a 20-word quotation from me in the press, but the underlying research was 200 words, and much more detailed and nuanced. 
 
The priority of our Press has to be to write a compelling story, with a focus on grabbing the attention of readers and keeping them buying the paper. 
 
“Shock horror” headlines are often a tendency when there is often no such thing, or the truth is a story with much more subtlety – but subtlety does not sell newspapers. 
 
And those same headlines are increasingly also designed to capture people searching on Google.
 
The very best of these journalists, with the best will in the world, know nothing of you and your circumstances and what is right for you. 
 
The best of them do care – but they are necessarily limited in what they can write, and have a business imperative to keep circulation or sales numbers up.
 
17.          Stop believing all funds are the same...
 
Some people buy and forget their funds simply because they do not understand that there are better alternatives.
 
This is illustrated by the £808,446 story (read the story here).
 
We compared the outcome for Harry vs the average fund in the UK All Companies sector.
 
1994-2014:
Harry portfolio £1,179,114
UK All Companies sector average £370,668
DIFFERENCE £808,446

 

18.          Stop believing index trackers are a complete solution

 
This is an easy one to deal with.
 
If an investor exclusively invests in index trackers it is because:
 
·         They are obsessed about charges (I’ve covered that one already), OR
·         They believe investing is otherwise hard work (ditto), OR
·         It is not possible to buy actively managed funds which are consistently above average (see the Missing £808,446 story)
 
Let me just focus on the £808,446 story.  We know that Harry's portfolio outperformed the sector average by £808,446.  With an index tracker, the result is a little better but still terrible!
 
1994-2014:
Harry portfolio £1,179,114
UK stock market index £454,000
DIFFERENCE £725,114
 
That is 725,114 reasons why you need to stop obsessing about index trackers.
 
19.          Stop thinking like you do, and stop thinking like everyone else
 
Albert Einstein said you cannot solve problems with the same thinking that created them.
 
So, STOP thinking like you do now – LET GO of those habits that you have got into, perhaps over many years.
 
Be honest with yourself and be disciplined.
 
Above all start putting this “Stop Doing” list into action now, because through practice you will make progress.
 
As Gary Player said, the hugely successful golfer of yesteryear, “the more I practice the luckier I get”!
 
FURTHER READING
Topic: Portfolio building


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