Have you ever thought why so many people who have money to invest choose ‘tracker funds’ rather than individual securities? One reason is to avoid the frictional costs which are inevitably associated with (regular) dealings in equities. Another reason is that the majority of fund managers have disappointing track records. The ones that consistently beat the market are rare commodities. I think there are good reasons why that’s the case.
It’s a lot to do with temperament. There are those who handle bull markets extremely well but don’t have the character to handle bear markets because they are not used to taking defensive action, they just don’t feel comfortable with being negative. The reverse also applies although probably rather less common. And there is a good reason for that, too. Just imagine that you are an investment manager whose approach is fundamentally very cautious. Your clients will not be happy. They expect to see their assets grow in value especially when they compare the performance of their own funds with that of their friends.
Take the last few years of underwriting at Lloyd’s. One doesn’t usually describe this activity as an investment, rather it is a business. However, whichever way you look at it there is a profit and loss account. Since the World Trade Center disaster in 2001 exceptional profits have been earned in most years. In my case I have encouraged my clients to become steadily more cautious since 2008. There have been good reasons in as much as the underwriters whom I most respect have become more cautious. Eventually I have no doubt that caution will prove wise but in the meantime good profits have continued to be earned and I frequently feel like I am the little boy who keeps crying wolf when there is no wolf in sight.
I manage my own money and that to which I have family access. Is this wise? It certainly fits my personality as I dislike letting go of control. However, if you look at our various portfolios they contain some exceptionally esoteric components. I am also conscious of that wonderful business book, possibly the only one in which I am interested, The Money Game, written under the pseudonym Adam Smith. In that book he describes the typical behaviour of an investor who sees the securities in which he has invested falling in value, recovering some of that lost value, and then falling still further. This process carries on until the investor is so fed up and can’t bear looking at the share prices that he sells out. This is almost invariably the perfect signal to buy. Contrary thinking!
What’s difficult is to match a generally positive personality to contrary thinking. It’s what I am always encouraging my Lloyd’s clients to follow: be greedy when others are fearful and fearful when others are greedy. This is the approach which Warren Buffet has consistently taken and it has certainly paid dividends. So if you are going to manage your own money, you had best try to detach yourself from market sentiment and maintain the ability to think for yourself.