Is wilful blindness harming your returns?
Malcolm Wheatley | Saturday, 3rd September, 2016
Sometimes, the best books on investing aren’t ostensibly about investment at all.
A case in point is Margaret Heffernan’s excellent Wilful Blindness, published in 2011. Subtitled ‘Why we ignore the obvious at our peril’, it’s littered with examples of individuals and organisations taking massive risks – and making massive blunders – by ignoring obvious dangers.
As Heffernan points out, much of the financial crisis of 2007 and 2008 can be blamed on wilful blindness. It’s not that many people didn’t suspect that the pile of dominoes was teetering – rather, they convinced themselves that either it wouldn’t happen, or that they’d be alright.
“As long as the music is playing, you’ve got to get up and dance,” is how Morgan Stanley’s chief executive, Chuck Prince, responded to a direct question about problems emerging in the United States’ sub-prime market. “We’re still dancing.”
Over at Lehman Brothers, chairman Dick Fuld was in a similar state of denial, insisting that Lehman was fine and wouldn’t collapse, right up until the moment that it did.
Here in the UK, HBOS ignored its own risk manager’s warnings. At Royal Bank of Scotland, meanwhile, the focus was on tidying the deckchairs, even as the bank steamed at full speed straight for the iceberg.
Here comes the pension precipice
As ordinary citizens, we’re just as culpable.
For at least a decade, experts have been warning of a gaping hole in most people’s retirement provision. The rational response is to save more, ideally in a personal pension or ISA, thereby benefiting from tax relief.
But as we all know from our daily lives, huge numbers of people do nothing, hoping to somehow muddle through.
And of those that do take action, many save far too little, or delude themselves with grandiose schemes of buy-to-let mini-empires, or running a pub or seaside B&B.
Hope over experience
Investors can be just as wilfully blind.
Indeed, many of the human foibles that get lumped together under the behavioural investing banner are manifestations of that same wilful blindness.
Buying beaten-down shares in the hope that their surely-unsustainable dividend yields won’t be cut, for instance. Making big bets on a highly-concentrated handful of shares in the hope of heavy capital gains. Hoping against hope that a slumping share will recover – even though it’s likely that it’s heading for the knacker’s yard.
The common link? The word ‘hope’, even in the face of ample experience to the contrary.
Gains left on the table
Similarly, many investors over-trade, jumping in and out of stocks in a knee-jerk reaction to newsflow.
Consequently, they often buy the wrong stocks or funds, at the wrong time, and at the wrong price. And then they sell them, usually for minuscule gains. Or, indeed, a loss.
A 2007 study of UK investors over the period 1992‑2003, for example, found that as a result of such money‑losing decisions, fund investors’ returns were around two percentage points a year lower than the funds in which they were invested.
Likewise, as investment author Tim Hale has pointed out in Smarter Investing, during the period 1984‑2002 – a bull market when the equity markets turned $100 of spending power into $500 – private investors succeeded in turning that same $100 into just $90.
What’s to blame? Jumping in and out of stocks, and jumping in and out of the market. Even when they have ample proof – generally from personal experience – that such strategies don’t work.
Clear long-term vision
The Motley Fool has always advocated a very different approach.
Simply put, it boils down to identifying what we consider to be well-managed high-quality businesses – ideally trading at attractive prices – and then holding them over the medium to long term.
Because by steadfastly following a carefully-considered strategy, backed by solid research, decisions are made based on facts and fundamentals, not fantasies.
Food for thought, in short, if your own approach isn’t as rigorously fact-based.
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Sometimes, the best books on investing aren?t ostensibly about investment at all. A case in point is Margaret Heffernan?s excellent Wilful Blindness, published in 2011. Subtitled ?Why we ignore the obvious at our peril?, it?s littered with examples of individuals and organisations taking massive risks ? and making massive blunders ? by ignoring obvious dangers. As Heffernan points out, much of the financial crisis of 2007 and 2008 can be blamed on wilful blindness. It?s not that many people didn?t suspect that the pile of dominoes was teetering ? rather, they convinced themselves that either it wouldn?t…