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Proactive investors will find much food for thought in this interview, where one top wealth executive reveals their top “money lessons learned” to findaWEALTHMANAGER.com.
Paul Abberley became Chief Executive of Charles Stanley in 2014, having previously served as Chief Investment Officer and before that as CEO/CIO at Aviva Investors London. An industry veteran with over 30 years of experience, he urges investors to be aware of all the psychological biases that might scupper their success – and to remember that some are very much easier to spot than others.
According to Abberley, disproportionate loss aversion can afflict the professionals just as much as self-directed investors, meaning that if an investment has done well they might be tempted to book profits too early and lose out on further gains. Instead, doubling down when an investment view is proving correct might be the more logical choice, he observes:
If you make an investment that you think is going to go from 100 to 110, when it hits 105 there can be a tendency to think ‘I might not do any better here’, leading to you get out of something too quick when it’s going well.
Conversely, the really smart investor might say instead, ‘Right, it’s gone up from 100 to 105 so clearly my thesis is right and I need to buy lots more at 105’. You have to be aware of the inner psychology that is driving you to cash in your chips and determine whether that’s logical.
While investors need to hold their nerve when their investments are rising to maximise gains, Abberley also cautions that they must also avoid the opposite – and very much more damaging – tendency people can have towards “riding a stock down”. As he explains, investors can find it difficult to let go of the psychological commitment they made when they initially put money into an investment:
In the reverse scenario, when an investment falls from 100 to 95 perhaps it’s time to think ‘Ok, this isn’t going to work’. What you often find, however, is hope triumphing over experience.
People often can’t bear the thought of selling at 95 when they bought at 100, and so hang on in the hope that it will rise again – even if they no longer think it’s a good investment. With investing, you have to learn when to hang on and when to let go.
The need for investors to be both tenacious and high conviction, and yet quick to change their minds when necessary, is one of the big ironies about investing Abberley has observed over his career. Another is that the need to achieve investment returns tends not to coincide with one’s best opportunities to secure them. Therefore, he advises starting well before a need for returns emerges:
The hardest time to make money from investing is when you need to make money from investing. Even the professionals often find it easier to generate returns when they don’t need them so much.
It’s just in the nature of things to be short of money-making ideas just at the time when you need to make money. Investing because you need to make a lot of return is not the best basis to do any sort of self-directed investing because that will lead you into making unsafe decisions.
While most will certainly try to adhere to sound investment principles and follow a well-thought-out plan, Abberley cautions investors to remember that they are only human – and therefore might be subject to a number of quite subtle psychological biases. One of the most insidious, he observes, is confirmation bias, meaning that investors see only what they want to see.
Something you see time and again – with professionals as well as self-directed investors – is confirmation bias. You have a thesis; you believe something is going to happen and this forms the basis of your investment rationale and so you’re forever looking for evidence to confirm that you were right.
If deep down you believe it always stays dry in May, then as an individual you won’t have the best chance of finding the rain cloud that will prove you wrong. Confirmation bias can really get in the way of good investing.
As the psychological biases Abberley highlights underscore, markets can never be truly rational. So, while investors should always pay heed to the consensus view on a certain asset class or market, they should also have the courage to execute a contrarian view – as long as their rationale for doing so is sound.
When I was a bond investor in the early 1980s, bond yields were rising dramatically around the world off the back of the US interest rate having risen to the level of 16%, yet I felt very differently to the consensus, bearish view on bond prices. It seemed to me that the markets had really taken leave of the underlying fundamentals because it was clear the US economy was struggling and that the Fed would be cutting rates going forward.
While everyone else was very gloomy on bonds I said, ‘Actually, bonds are really good value here’ and so we bought an awful lot of bonds at very high yields. Subsequently the markets did rally, interest rates came down significantly and we did extremely well.
The lesson learnt there is that you have to have the courage to invest in the way you think is right and not be swayed too much by consensus sentiment. If you do that and get it right the scale of the gains can be very significant. It’s not about always being contrarian, of course, but rather seeing opportunities to make money from the markets being wrong.
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While Charles Stanley can trace its roots back to a banking partnership formed in 1792, the firm is known today for its cutting-edge technology provision for clients, along with its extensive network of regional offices.