Mind the Gap
22nd March 2021
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.
Since 1994, Dalbar, in the US have been producing an annual study that looks to measure the effects of investor choices to buy, sell and switch into and out of different investments over short and long timeframes. The results are startling over all time periods.
If we just look at the last five years, the US stock market as measured by the S&P 500 returned 8.49% per annum. Over the same period, the average US equity investor achieved a return of just 3.96% per annum.
To put this in context, investors underperformed the market in which they were invested by a whopping 4.53% 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 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.
Carl Richards, a US based adviser and creator of the Sketch Guy column in the New York Times, refers to this phenomenon as the “Behaviour Gap” and wrote a book on this subject in 2012. When we were moving office in September, I stumbled across a box of Carl’s books. I’d like to give these away and will offer a copy (signed by Carl) to the first eight people to message me at firstname.lastname@example.org. I’m just sorry I don’t have more copies of this great book.