September is the month when cohorts of fresh-faced young graduates descend upon the City of London to begin careers as professional investors – usually as analysts charged with coming up with stock ideas for portfolio managers.
Schroders' Value Perspective team offers three pieces of advice that, while important, are unlikely to have been mentioned in the official induction sessions.
1. Get used to being wrong – you are your own worst enemy.
When you come up with an investment idea, your portfolio managers are going to want you to express your conviction in it – but on no account let this desire lead you to have an inflated level of confidence in what you believe.
The reality is that, if you are right even 60% of the time over your career, you will be among the top 20% of investors – and you will still be wrong almost half the time.
In the world of investment your brain is not always on your side and, without some sort of framework to keep you both honest, it is going to do everything it can to convince you you are right – even when you are wrong.
Even experienced investors do not always realise how they are fooling themselves but try and remember – convictions are for convicts, not investors, so learn to be sceptical about what you think you know.
2. Some of your investment ideas will make losses – get used to that.
Show us someone who has worked as a professional investor for three or four years who has never had a day when one of their stocks fell by a third or more and we will show you a liar.
Profit warnings happen and losses – big ones – will come.
This can cause some portfolio managers to be grumpy but do not allow the inability of someone else to cope with the realities of their job to ruin your day
In the various portfolios The Value Perspective team runs it has had losing positions that have cost £100m and it has had winning positions that have made £100m.
Fortunately, the nature of our job is that we are both analysts and managers – in other words, we recommend stock ideas to the wider team and we also make the investments. In short, we are responsible for our own profits and losses.
As such, we are keenly aware the price of the outsized win today is – statistically-speaking – the outsized loss lurking in the portfolio that will rear its ugly head tomorrow, next week or next year.
Over the long term, value investing has served us very well but often we did no better a job analysing our outsized winners than the average stock – and, we assure you, we did not lose a moment’s sleep over our losers.
We appreciate it is harder if you are new to investing and will probably be harder still should favour visit you before misfortune.
One day your stock will fall dramatically
One approach you might like to adopt therefore is to take note of every stock that falls dramatically and accept that “one day, that will be mine”, which – at the risk of over-intellectualising our point – takes us into the realm of classical philosophy, specifically Stoicism.
As the First Century Greek Stoic Epictetus observed of those who wished their loved ones could live for ever:
“You are stupid for you wish to be in control of things which you cannot – you wish for things that belong to others to be your own. So likewise, if you wish your servant to be without fault, you are a fool – for you wish vice not to be vice but something else.
“But, if you wish to have your desires ‘undisappointed’, this is in your own control. Exercise, therefore, what is in your control. He is the master of every other person who is able to confer or remove whatever that person wishes either to have or to avoid. Whoever, then, would be free, let him wish nothing and let him decline nothing that depends on others – else he must necessarily be a slave.”
3. When considering how to invest, look at what has actually worked.
One of the great platitudes of investing tends to be witnessed when a portfolio manager is talking about somebody else who has a totally different style to investment they completely reject.
If they are in a good mood – no profits warnings in their portfolio that day, perhaps – they might finish up by saying: “I don’t follow that approach – but, of course, there are plenty of ways to make money.”
No. Unfortunately, there are not.
Investing is a ‘zero-sum game’. To make money I must buy shares from someone that then appreciate – thereby denying them those profits.
I must also sell my future losers to someone else, so they suffer the losses instead. Investors cannot shuffle stocks from Fund A to Fund B to Fund C and back again and make an excess return each time.
There’s no way that all the fund managers can beat the market after fees. Of course there will be those that do, but there will always be losers.
You won't know if you're a good investor or a bad one initially
At the beginning of your investment career, you do not know if you are a good investor or a bad one – so give yourself every chance of being the former and start with a tailwind.
Say you were starting your career at a medical school that offered courses in acupuncture, surgery, homeopathy, pharmacology and voodoo – would you not consult the literature to see which one added the most value in the most cases?
For investors – new and old – we would recommend reading anything by Cliff Asness, and particularly the paper Value and Momentum Everywhere, which he co-wrote with Tobias Moskowitz and Lasse Pedersen.
The Alpha Architect blog also has great reviews and links to academic evidence. We wish you luck in your new career – that always comes in handy – but trust these three tips will prove helpful too.
- Ian Kelly is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.
Important Information: The views and opinions contained herein are those of Ian Kelly, fund manager, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.