Most of us will have already made a raft of resolutions to stick to in the new year, but you shouldn’t forget your financial affairs in that mix. Here, Tom Becket, Chief Investment Officer at Psigma Investment Management, outlines three common mistakes investors must resolve to avoid to maximise their returns in 2018.
To help you be at your financial best in 2018, I’d like to outline some of the most common investor mistakes you need to avoid and bring those into context with the lessons learnt from the Global Financial Crisis.
Now, of course, all investors make mistakes (you can read about some of the famous investors’ mistakes and even they only tend to get about six out of ten of their investment decisions correct). However, by understanding the three big ones described below, you are likelier to side-step the more avoidable errors and thereby significantly improve the performance of your investment portfolio.
Mistake 1: “Catching a falling knife”
One of the first decisions I made as Psigma’s CIO in the back end of 2008 was to start committing money back once again to equity markets. Having been very cautiously positioned throughout 2008, we believed coming towards the very latter stages of that year that equity markets were starting to get very cheap but actually, having seen markets fall aggressively, that was the prelude to further falls at the start of 2009.
The mistake we made here was trying to catch an investment that is falling or “catching the falling knife” as it’s talked about in investment terms. One of the key ways to try and prevent yourself from doing that is to be sure that you’ve reached the bottom in that investment at that point in time before you start committing money to that investment mistake. I’m pleased to report that the falling knife eventually started to correct itself and obviously made a great deal of money afterwards in 2009 and 2010. However, that’s probably the first mistake that investors most commonly make about their initial investment decisions.
Mistake 2: Sizing your investment positions inappropriately
The second mistake I believe investors most often make, is backing an investment with too high a level of conviction at the wrong time. Learning about position sizing is absolutely vital, whether you are a private retail investor or indeed a large pension fund.
Learning about position sizing is absolutely vital, whether you are a private retail investor or indeed a large pension fund.
Perhaps the biggest example of when we over-committed to an investment was to Japanese equities back in 2011. Myself and one of my colleagues, Tim Gregory, went to Japan at the back end of 2010 and were greeted with scepticism and amazement by some of the fund managers that we met there. In fact, one manager asked us what on earth we were doing in Tokyo at the time; it had been so long since he’d seen people visit there to review his fund as an investment case. We viewed this as a great contrarian opportunity and started aggressively buying Japanese equities at the start of 2011 and then got hit very tragically by what happened around the Fukushima earthquake and the problems around their nuclear plant.
I learnt a very valuable lesson: no matter how high a conviction your ideas might be, always try and make sure you scale that position appropriately and try to expect the unexpected – as we certainly found with Japanese equities at that point in time.
Mistake 3: Thinking you are smarter than you are
The third and final mistake I want to highlight is everyone’s tendency to believe they are smarter than they actually are – that’s investors and investment professionals included. There are long periods of time when your style or your investment philosophy or your process can be out of fashion. Here you could actually be fighting against a tide moving in the opposite direction; in particular you could be backing investments that you think are full of value, but no one else agrees, leaving you constantly fighting a losing battle.
That period happened for us between the end of 2014 and the back-end of 2015. My view is that you should try to learn from other people’s positioning and what other people are saying, rather than just trying to isolate yourself and think about your own portfolios and investments as a stand-alone entity.
The best thing to do is keep a very open mind and take into account the words of John Maynard Keynes, when he said that the markets can stay irrational much longer than you can remain solvent.
I learned between 2014 and 2015 that the best thing to do is keep a very open mind and take into account the words of John Maynard Keynes, when he said that the markets can stay irrational much longer than you can remain solvent.
I’m pleased to report that eventually our positioning and high conviction approach towards certain assets in 2015 paid off in 2016 and are still paying off today. However, that certainly was a very big lesson learned in 2015 and perhaps now that’s been implemented further into our investment process.
To conclude, I believe the best thing that investors can aim to do is caution themselves against catching the falling knife; make sure they position themselves appropriately and size their positions in a sensible fashion; and, finally, never try and be smarter than they actually are.
With those lessons in mind, I think investors will go a long way towards having greater success with their investment portfolios in 2018 and beyond.
Your next steps
There are abundant biases and common mistakes investors can easily fall prey to, and it can be hard to see where you are exposed without a “second pair of eyes”. To explore how a professional can help you see – and avoid – investment errors, try out our smart online tool, or speak to a member of our team today.