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Don’t Let the Grexit Drama Cause You to Commit the Individual Investor’s Greatest Mistake

Credit: Terrance Heath

The drama that’s currently unfolding in Greece and the Eurozone is enthralling.

What’s going to happen if Greece defaults on its loans? What would the result be if Greece were to exit the Eurozone (the Grexit)? What would the impacts be on the Eurozone’s shared currency, the euro, if Greece leaves the currency regime?

I don’t have the answers to the questions nor do I think there’s anyone who has the answers. But crucially, this wouldn’t stop me from investing nor would it make me even consider selling my shares.

I’m not telling anybody what they should do with their investments, but I hope what’s in this article can give investors of all stripes some food for thought.

The greatest mistake

Individual investors are prone to making mistakes. I should know – I belong to that group. But one of the worst things investors can do to harm their returns is exemplified by an example David Swensen gave back in 2008 in a guest lecture.

Swensen, the Chief Investment Officer of Yale University’s US$22 billion endowment fund, may not be widely known outside investing circles.

But, his accomplishments as head of Yale’s endowment fund since 1985 have been exemplary; from 1985 to 2013, Swensen had helped the fund to generate annualised returns of 13.8%. Such a track record gives tremendous weight to Swensen’s views on investing.

Coming back to the guest lecture, Swensen cited a study that investment research outfit Morningstar had conducted about individual investors’ returns from investing in mutual funds in the U.S. (mutual funds there are the equivalent of unit trusts here).

For those unware, there are two ways to measure the performance of unit trusts and mutual funds:

  1. Time-weighted returns: This measures the performance of the fund’s managers itself and is the figure that’s most often shown in promotional materials as it’s a good proxy for the manager’s skill in picking the right stocks or asset classes to buy.
  2. Dollar-weighted returns: This takes into account the inflow and outflow of cash that’s experienced by a fund and hence is a much better account for the actual returns that investors in the fund have enjoyed.

The results from Morningstar were appalling; the research outfit had studied stock mutual funds belonging to 17 different categories and found that the dollar-weighted returns in all the categories studied were less than the time-weighted returns.

At times, the differences were as much as 13.4% per annum! Even Swensen, who’s one of the best in the business, had managed to generate a return of “only” 13.8% over nearly 30 years!

In Swensen’s words, the phenomenon had occurred because the individual investors had “bought after the funds had gone up, and they sold after the funds had gone down.” Put another way, investors had basically chosen all the wrong times to buy and sell.

A better way

I thought this current environment – with all the negativity swirling around – is a great time to bring up Swensen’s lecture to serve as a reminder that there can be a better way to invest.

Instead of selling our investments as a result of fear and temporarily depressed share prices and then trying to buy them back again when the dust settles (often to our detriment!), it can be easier to just hold on tight to our investments through thick and thin if we had bought at reasonable prices, shares of great businesses that have the ability to grow over the long-term.

From 2000 to 2014, there were tremendous global and regional worries for investors to fret over. Here’s a snapshot (and an incomplete one at that!):

  • Bursting of dotcom bubble in 2000
  • September 11 terrorist attacks in 2001
  • SARS panic in 2003
  • Unfortunate tsunamis in South Asia in 2004
  • Global Financial Crisis from 2007 to 2009
  • Flare-up of a debt crisis in Europe (also involving Greece) in 2010
  • Uprisings in the Middle East in 2011
  • Cyprus bank bailouts and the shutdown of the US government in 2013

But, companies like Raffles Medical Group Ltd  (SGX: R01), Jardine Cycle & Carriage Ltd  (SGX: C07), Dairy Farm International Holdings Ltd  (SGX: D01), and Vicom Limited (SGX: V01) have seen their share prices clock triple-digit returns since the start of 2000.

Raffles Medical, Jardine C&C, Dairy Farm, and Vicom share price

Source: S&P Capital IQ

Despite the troubles plaguing the world and the Southeast Asian region, the quartet had seen their profits climb steadily (see chart below) through it all and this growth was eventually reflected in their share prices.

Profits for Raffles Medical, Vicom, Jardine C&C, and Dairy Farm from 2000 to 2014

Source: S&P Capital IQ

A Fool’s take

The experience of the quartet contain two important lessons for us: First, great businesses can grow even in difficult environments; second, great businesses that do grow will more likely than not, reward shareholders over the long-term.

Given 1) how difficult it can be to jump in and out of our investments as Swensen’s lecture showed and how 2) long-term buy-and-hold investing can work, please consider your investing decisions carefully whenever you want to sell because you are worried about what happens next. Selling decisions shouldn’t be taken lightly (even if you’re concerned with the hullabaloo going on with Greece right now).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group, Vicom, and Dairy Farm International Holdings.