Investing is simple, not easy

5 months have passed since I started this blog by posting some rather pessimistic views on the remarkably poor array of investment vehicles available to individual savers. However those of you that persevered and endured the entire article, probably remember that it did actually conclude on a positive note as I exhorted the benefits of a do-it-yourself approach to investing.

Almost a half-year on, and fresh from a multi-month asset rally (just think equities and gold since March of last year), I can’t bring myself to resume my optimistic “mode”. Some of this is surely due to the dire economic circumstances of my home country (as one of the poorer performing ”PIIGS”, second only to Greece in terms of scorn received by EU’s economic authorities). But the lion’s share for my bearish sentiment has little to do with location and much with the dawning realisation that, to put it bluntly, we as humans are just not prepared for the investing game.

Man’s fickle nature is not exactly a new and revealing finding for me having long been both an observant and admittedly a prime example of its most evident traits. It is nonetheless the realisation of the extent to which we are so “hard-wired”. To make matters worse, and despite popular thinking, merely acknowledging certain psychological or behavioural shortcomings in ourselves (often after attending a seminar or reading a book on the subject) is clearly insufficient in its impact on these very same issues. James Montier, famed market strategist of Societé Generale fame, now operating out of Jeremy Grantham’s GMO organisation, put it best when he stated:

“Every fund manager who comes to one of my presentations takes a 20-question test that convinces them they suffer exactly the same biases as everyone else. People respond to that in one of two ways: The first is to say, "Now I understand it, I'm smarter than everyone else, so I can outthink everyone else." No, you can't! You've just failed behavioural economics 101, which explains that we are all overconfident in our abilities. The other response is, "Okay, I understand my biases. Now help me develop processes to spot where they are most likely to occur, and minimize the scale of these biases."

The previous quote is but a drop in the vast, vast ocean of fundamental human biases that stand in the way of our success as investors. If the morally questionable nature of the asset management industry wasn’t detracting enough for individuals (with its high fees, an perverse incentive systems), we now have to add our own self-placed traps. Overconfidence, as referred to earlier, is merely the tip of the iceberg as far as the catalogue of investing traps goes.

Unsurprisingly, the very few investors who obtain above average total after tax returns over the long-term share a set of behaviours that are apparently obvious in their nature and yet deceptively difficult in their application. Below is a brief list of behavioural patterns I have weeded out form the writings of successful participants (as opposed to and often in direct contradiction with detached academics!)…

1. Be patient: (we all are in theory!) but picture a period of 7-10 years vs. 3 to 6 months when making investment decisions
2. Approach theories with healthy scepticism: look for information to challenge your assumption and thus do away with “self confirmatory bias”
3. Focus on investment process, not outcome: a lottery ticket win does not reflect a wise number selection process
4. Act out your contrarian instincts: eliminate the “herding” bias
5. Learn from history: Remember that the 4 most dangerous words in investing are: “this time it’s different”


As if often the case in matters of money and investing it pays to heed the words of the wise, as Warren Buffet once said:

“Investing is simple, but not easy”