I was thinking about thinking last weekend when serendipitously I met business rethinking guru Connie Comber.
For want of something better to do, I’d been thinking about thinking among individual investors – Professor Google later told me it’s called ‘metacognition’.
I’d also been pondering on how to entice readers into an editorial on rethinking – hence the headline
which recasts sex ‘n’ drugs with an equities’ slant.
Comber’s mantra is that we need to reframe the way we think about business and, post-global financial crisis (GFC), I think she is seriously
onto something.
Post-FOFA, post-QE I, II, III etc, how do advisers reframe the way they talk with clients? How do advisers bracket their own world views to see and hear through their customers’ eyes and ears?
As I’ve listened to Australians in recent months, the consistent message is one of suspicion. Australians are seriously gun-shy of experts – and sorry to say this, that includes advisers.
Investment Trends’ online broking survey published in mid-February shows that concern about global financial markets has returned to late-2008 levels – the depth of the GFC. Capital gains expectations have collapsed.
All this leads me back to Comber, metacognition and two US academics, finance professors Terry Odean and Brad Barber, of UC Berkeley and UC Davis respectively, who’ve authored numerous papers on individual investors’ thinking, feelings and behaviour.
In their seminal article, ‘Trading Is Hazardous To Your Wealth”, (Journal of Finance, April 2000), they showed that on average, the most active traders had the poorest results, while the investors who traded the least earned the highest returns.
In their article, “Boys Will Be Boys”, in The Quarterly Journal of Economics the next year, they showed that men acted on their useless ideas significantly more often than women, and so women achieved better investment results than men.
Now, if you combine this with Daniel Kahneman’s observations in Thinking, Fast and Slow that individual investors can save time and agony by reducing the frequency with which they check how well their investments are doing, then you’re beginning to re-image business à la Comber’s paradigm shift.
Closely following daily fluctuations is a losing proposition, Kahneman says, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains.
Once a quarter is enough, and may be more than enough for individual investors.
The deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer.
You’re also less prone to useless churning of your portfolio if you don’t know how every stock in it is doing every day (or every week or even every month).
A commitment not to change one’s position for several periods (the equivalent of ‘locking in’ an investment) improves financial performance.
If turmoil and uncharted waters are the new conditions, then the best captains will be those advisers who can inspire their passengers and crew to take stock and ride out the storm as waves crash and roll all around.
IFA welcomes your contributions editorially – news, features, emails to the editor. This is your forum, your publication. Please email the editor, Philippa Yelland, at philippa.yelland@morningstar.com.
