Professional investors are, of course, smarter than the rest of us. They have a massive information advantage over the average punter and are well aware of all the behavioural biases which may interfere with rational decision-making. Hmm. This entertaining graphic from global financial services website Citywire is actually designed for the professional investor. The theory, and practice, is that professional investors are also human beings, and have all the failings of the ‘average’ investor.
The author says: “Having met and worked with a wide range of investment managers and advisers, I can tell you that the emotions and actions described in this chart are not exclusive to private investors. “Indeed the chart tells the story of an investor who lacks a clear, sound, logical strategy and instead relies on emotion, which the majority of investors also seem to do. “This is not meant to be a criticism; once you admit that you lack a clear strategy you can then start to develop one to help with your investment decisions.” One of the telling points in the graphic, to which all professionals fall victim, is ‘looking back’. A rational person would not see the point in following a stock’s fortunes or misfortunes after it is sold.
But everyone does. In this graphic, the investor has a strong element of momentum in his or her style, which most funds managers have because of business risk and human behavioural tendencies. The main lesson from the graphic should be, though, that whatever the investment style, discipline is essential to avoid potentially catastrophic losses. The Citywire author claims to be a value investor, which is common enough in the professional world. He says the value style offers “a consistent, reliable and proven method with which to make cool, calm and logical investment decisions”. The same could probably be said of the growth style, or even pure momentum. In a complex world there are lots of ways to make money. Until human beings are taken out of the process, there will also be ways to lose it.
