Do You Have This Bad Investing Behaviour?

[Editor’s note: This article first appeared in the 23 December 2017 edition of The Motley Fool Singapore’s free investing newsletter, Take Stock Singapore.]

We’re getting so close to Christmas! I’m sure by now you would have heard the song, Santa Claus Is Coming To Town, in many of the malls in Singapore. The song contains a stanza that goes:

He’s making a list
And checking it twice
Gonna find out who’s naughty and nice
Santa Claus is coming to town”

If Santa’s making a list of stock market investors who have been naughty, it would likely be a long, long list. In today’s edition of Take Stock, I want to share just why Santa is likely to be displeased with many investors, as knowing the reason can help make you a better investor.

A Great Fund Manager, And Lousy Investors

Teh Hooi Ling, who runs the Singapore-based Inclusif Value Fund, wrote an article in 2014 that shared a fascinating statistic on superstar fund manager, Peter Lynch. From 1977 to 1990, Lynch ran the Fidelity Magellan mutual fund in the US (the equivalent in Singapore would be a unit trust), and led his fund to a stunning annual return of 29%. “Had you invested as little as US$37,000 with him in 1977,” Teh wrote, “you would have been a millionaire in 1990.”

But what was fascinating about Lynch was not his fund’s return: It was his investors’ returns. You see, Teh also wrote that Lynch believed that over half the investors in his fund lost money. Fascinating, isn’t it? Well, this tale on Lynch may be apocryphal. But, it corroborates extremely well with the numbers found elsewhere on the difference between an investor’s returns, and those of his investment vehicle.

Naughty Investors

David Swensen, the famed chief investment officer of Yale University’s multi-billion-dollar endowment, once gave a lecture and recounted how fund-investors’ returns over a 10 year-period had lagged the returns of their funds, often badly, and by as much as 13.4% per year (!!).

In another example, investment research outfit DALBAR analysed the returns of American equity mutual fund investors and compared them with the S&P 500’s price changes over rolling 20-year periods from 2003 to 2012. The results were again unequivocal – investors in the equity mutual funds had underperformed the index by huge margins. For instance, in the 20 years ended 2008, the S&P 500 had delivered an annual return of around 13%; the average equity mutual fund investor’s annual return was less than 4%.

The CGM Focus Fund, run by Ken Heebner, is a documented case of the Lynchian tragedy I described earlier. In the decade ended 30 November 2009, the CGM Focus Fund generated an incredible annual gain of 18%. The average CGM Focus Fund investor however, had shockingly lost 11% per year over the same period.

It seems that investors are always losing out, no matter how great the underlying investment vehicle is. A huge part of the problem stems from many investors’ horrible investing behaviour. They had a propensity to buy and sell at exactly the wrong times – chasing a rising investment, and then bailing out when things fall apart temporarily. This is not just my opinion: It’s what Swensen, DALBAR, and Heebner have concluded as well.

Now you see just why Santa would have a very long list of naughty investors?

A Christmas Present

It’s unheard of for a normal investor’s capital to be locked up in a unit trust, mutual fund, or individual stock. But it’s not uncommon to hear of lock-up periods measured in years for new investors in hedge funds (I loosely define hedge funds as funds that are under lesser restrictions, and that are only available to wealthy individuals or organisations).

Borrowing this concept, having a self-imposed lock-up period for your investments (as uncomfortable as it may seem) could possibly be one of the best things you can do to improve your returns – and get on Santa’s “Nice” list for investors.

Our experience in The Motley Fool Singapore’s premium stock recommendation newsletters also bear out the importance of being patient. Consider this:

a) In April this year, we recommended the shares of a specialty retailer that caters to pet owners, recreation farmers, ranchers, and people who enjoy the rural lifestyle. By July, the company’s dividend-adjusted stock price had declined by 19.2% from our recommendation price. But today, we’re sitting on a gain of more than 20% over our recommendation price.

b) In June 2016, we selected a leading online travel agent as a recommendation. Our timing couldn’t be worse. The company had (and still has) heavy exposure to Europe, and our recommendation came just before the United Kingdom held a referendum on whether it should stay in or leave the European Union. Uncertainty over the eventual Brexit vote caused the company’s stock price to fall by 14.7% in total in just three days after our recommendation. But right now, we are up nearly 30% from our recommendation price with the online travel agent.

Many investors have poor behaviour, as evidenced by the data I’ve shared above. A good way to correct this behaviour is to simply have patience, provided the right investments are selected in the first place!

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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 company mentioned.