Don't Let Fake-uanimity Get You

March 22, 2019

 

I initially wanted this to be a post about how someone could generate outstanding investment returns without being what's traditionally considered a top investor - say, for example, lacking unusual information advantages or extraordinary analytical wizardry. I started to write that someone probably only needed to be in the top quartile of investment talent to succeed. Then it became top half. And then I realized that the person could generate excellent returns irrespective of where she stood compared to other investors based solely on talent.

 

That, of course, is heresy in an industry which draws many of the brightest minds, many of which are never shy of displaying their intellect. But it's far more important for an investor to have an accurate representation of his/her talent and capabilities relative to other investors and to create a strategy that can then deliver superior results. No aptitude or interest in investments? Not to worry! Through the magic of cheap index funds, for example, investors could have participated in the long upward trend since the most recent financial crisis. 

 

Of course, lots of investors have only benefited partially from the general upward thrust in financial markets. According to research firm Dalbar, the S&P 500 Index averaged 9.85% a year for the 20-year period ending in 2015, but the average equity investor only earned 5.19%. The difference is largely attributable to unfortunate timing, allocating more money at relative highs and fearfully withdrawing at lows. And that behaviour is hardly the sole province of retail investors. In a recent interview with Ted Seides, Rahul Moodgal describes a fund manager who lamented that his fund had compounded at 15% but supposedly sophisticated investors had only seen returns of about 9%, again as a result of ham-fisted timing. 

 

Investors are notoriously overconfident about their ability to manage cycles, but this is only partially a hubris of intellect. Just as much, it's overconfidence in assessing one's temperament and risk appetite. It's no great trick to be sanguine when everything looks rosy.  I've coined a term for this tendency in myself: "fake-uanimity", that is, fake equanimity. I've written a lot about equanimity in investing over the past 5 years, starting with a post on 'Serenity, Insight and Investing' in 2014. But time and time again, I sense my equanimity being dashed, both in and out of the sphere of investing. 

 

There are various approaches to try and counter investing fake-uanimity. Some may choose rigid behavioural rules or purely quantitative approaches. My current favoured path is to demand a much higher bar of quality and knowledge on any single-name stock I own. But the heart of any choice is relentless, unyielding self-reflection. Clearly, the best time to do that is before you've lost any money (or as I've said elsewhere, if you want profit, prepare for loss). But with many markets at recent highs, most people won't have any interest in such preparation. Sadly, that's exactly how fake-uanimity gets you - luring you into complacency until it's too late.

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