The Investor’s Worst Enemy

The SPDR STI ETF (SGX: ES3) is an exchange-traded fund which closely mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI). Since its inception on April 2002, the fund has generated a respectable total annual compound return of 7.21% through 31 October 2015.

In other words, investors in Singapore have enjoyed a fairly decent 13 year run so far. But here’s the thing: I’ve yet to come across statistics about how investors in the fund have actually performed, but I’m willing to wager that their performance will be far worse than the fund’s own number.

Ken Heebner’s experience running the CGM Focus Fund provides a striking anecdote for why I think so. In the decade ended 2009, the CGM Focus Fund, a stock mutual fund in the U.S. (mutual funds there are analogous to unit trusts here in Singapore), had generated stupendous gains of 18% annually.

An average CGM Focus Fund investor however, had shockingly lost 11% per year over the same period. The example of Heebner’s fund and his investors, while egregious, is sadly not unique.

In 2008, David Swensen, the very successful long-time manager of Yale University’s US$24 billion endowment fund, had given a lecture in which he shared the following statistics:

  • Investing research outfit Morningstar had studied the 10-year returns of 17 different categories of equity mutual funds in the U.S.
  • On average, investors in all 17 categories had underperformed their own funds. The worst category had even seen its investors underperform the funds by 13.4% per

How did such a scenario develop for the investors in the Morningstar study? According to Swensen, it was because “they bought after the funds had gone up and they sold after they had gone down.” In other words, they had committed a cardinal sin in investing: Buying high and selling low.

Performance-chasing – and the subsequent bailing when temporary downturns occur – is a horrible punishment investors inflict on their own portfolios. It is essentially what happened with the CGM Focus Fund too.

The Wall Street Journal had an article that described the curious fate of the CGM Focus Fund and its investors. The article had the following passages (emphases mine):

“The fund surged 80% in 2007. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009, though it is up about 11% for the year through Tuesday.

A huge amount of money came in right when the performance of the fund was at a peak,” says Mr. Heebner, the fund’s manager since its 1997 launch. “I don’t know what to say about that. We don’t have any control over what investors do.””

In his 1949 book The Intelligent Investor, the grandfather of investment analysis, Benjamin Graham, had introduced investors to their worst enemy:

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

The Intelligent Investor has been published for more than five decades now, but investors have continued to be beat their own portfolios to pulp over the ages, as we have seen earlier. It’s a real pity because bad investing behaviour is something that can be corrected through simple things.

When investing, we’d do well to keep Graham’s wise words in mind and watch out for any signs of self-sabotage.

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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 doesn't own shares in any companies mentioned.