Robin Powell Archives

Investors need to learn to sit on their hands

Robin Powell & Barry Ritholtz/ The Big Picture – Investors need to learn to sit on their hands

Hello there. It’s deeply ingrained in the human psyche that taking action is a positive thing. And in many cases it is. But successful investing usually entails the very opposite — in other words, discipline and self-restraint, feeling comfortable with doing nothing.

Here’s Barry Ritholtz, one of the most popular investment bloggers in the United States.

I began as a trader and I sat next to a row of guys and one guy was making a lot of money and the guy next to me wan’t making money. It kind of perplexed me as a newbie, how can these two guys, how are more or less…it looks like they doing the same thing, you know, moving there stuff around on the screen, buying and selling that. This guy is really profitable, this guy isn’t. And so, it started me about 20 years ago researching what was then the nascent field of behavioural economics. Why peoples psychology works against them, why the way we’re wired, your own wetware works against you in capital markets. And that gradually, over time I became less and less active as an investor. My holding periods became longer and longer and eventually I more or less adapted, I don’t want to say Warren Buffet’s “my holding period is for ever” but you start thinking about in terms of decades, not weeks and months.

One of the problems we face as investors is that we’re surrounded by “noise”. For example, we see and hear stories on radio and television about markets falling or rising sharply, and we’re tempted to act on impulse. And the newspapers are full of ideas about the latest investment opportunities. Almost invariably though, the best course of action for those with the right investment strategy in place, is inaction.

The biggest enemy of an investor is themselves. There is an number of studies that look at investor performance. Not versus a bench mark but versus their own holdings. And most investors underperform their own holdings. Now why is that? Well, some guys shows up on TV, his fund is up strong that year, the looks the part, he sounds good, so investors all pile into that. And what happens at that point: The mean reversion begins and after that hot streak comes to an end that fund either goes back to normal returns or worse, it makes up for that strong period. So what did they do?They sell out of the bottom. The ideal time to buy is not when somethings had a huge run up and the guys on the cover of a neutral fund magazine, it’s because I want exposure to that asset class and this is the least expensive and most efficient way to get that exposure.

Thank you to Barry Ritholtz for that insight, and to you for watching. Goodbye.

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Even fund managers can’t identify future outperformers

Even fund managers can’t identify future outperformers
Robin Powell
Prof. Raghavendra Rau – Cambridge Judge Business School

One of numerous studies showing how hard it is to identify, in advance, a fund that will outperform over the long term, was conducted by Cambridge Judge Business School in 2014. What the researchers wanted to find out was whether fund managers themselves can spot talent in each other, and perhaps benefit by copying what talented managers do.

“As a normal investor, someone who is not a fund manager, how do I find a good fund manager? What I do is maybe look up his rankings, maybe look up his portfolio holding, maybe I’ll say that this manager has been the best manager over the last two or five years, consistently beating his benchmark over the last few years. So, but what other information do I have? Not very much. But fund managers are in the same business, they hang out with each other, they go to Pubs together. They may not discuss their trades, but you talk to people and you can figure out pretty fast who are smart people and who are not smart people.”

It seems logical to think that if anyone can identify a future star manager it should be their peers. But the Cambridge study found that fund managers are as bad at spotting talent as the rest of us.

“It turns out, according to our study, that the people who copy are pretty much what you call desperate fund managers. They are managers who have not done very well. They have suffered an outflow of funds over the last year. They have funds that have underperformed, they have usually large fees. So now here is the problem: You’re a fund manager in a pretty bad state. You have no money to spend on research, you have no money to hire an analyst of your own. What do you do? Wouldn’t it be possible to find superior fund managers and just copy their trades? But how do you pick? Who do you know is a superior fund manager? What you should see are that the fund managers whom you copy don’t necessarily have good performance before you copy them, but they should have good performance after you start copying them. That means you identify the people whose public information will not tell if he’s a good fund manager or not, but private information will say if he’s a good fund manager or not. We don’t find out. What we find is: Copycats copy funds with good past performance. They copy funds which are exactly the kind of funds that you and I would copy with no information about these funds at all.”

This is yet more evidence trying to pick future winner is a thankless task. Far better not to try it at all, and simply aim to capture market returns by indexing. Thanks for watching.