The Enemy Is Staring You Right In The Face

Benjamin Graham once famously said that “The investors chief problem and even his own worst enemy is likely to be himself.”

Graham was a British born American economist and professional investor who sadly died in 1976. Warren Buffett described him as the second most influential person in his life after his own father.

We have recently uncovered some research conducted in 2007 by a gentleman by the name of Lukas Schneider, an employee at Dimensional Fund Advisers.

In 2007, Mr Schneider studied and analysed the returns on all UK Equity funds between 1992 and 2003. The results are astounding and certainly support Mr Graham’s view.

During the period in question (1992-2003) the FTSE all share returned an average return of 9% a year. The average UK equity fund achieved a return of 7% a year. Now, this doesn’t surprise us as we know that there is no statistical evidence for the persistence of performance and that the average active fund manager cannot consistently beat the market. Perhaps the most surprising conclusion from the research is the fact that through the observed period, the average UK equity fund invetor achieved a return of only 3.8% a year. To put this in context, investors underperformed the funds in which they were invested by 3.2% a year and the market by a whopping 5.2% a year.

The only explanation for this huge difference in returns is INVESTOR BEHAVIOUR. That is, that they made decisions based on emotions rather than sound academic foundations. They simply sold or panicked out at the wrong time or they bought in at the wrong time.

The research supports our belief that the dominant determinant of long-term, real-life investor returns is the behaviour of the investor himself. Many investors believe, and have been lead to believe by their financial adviser that their returns depend on being in the right funds or types of investments, or, whether they are in or out of the market at the right time. The dominant determinant is behaviour, NOT selection and certainly not timing.

It is undeniably clear that investors can almost double their return by simply avoiding harmful timing decisions and by maintaining a disciplined and rigorous buy-and-hold strategy.

The trick is to find a firm of investment advisers who can shield you from the “noise” that may blow you off course and that has the courage to stick to their guns no matter what.