Over the years, I’ve seen investors make all sorts of mistakes. Buying at the wrong time… selling at the wrong time… buying when they should have sold… selling when they should have bought… and so on, and so on.
The effects of such mistakes are insidious. Trading costs, missed opportunities, and losses resulting from flawed judgement calls. In investing, as in sport, sometimes success is simply down to avoiding mistakes.
And as I’ve pointed out previously, American researchers Brad Barber and Terry Odean quantified just how expensive such mistakes can be. Analysing the trading records of 10,000 brokerage accounts of individual investors over a seven‑year period, they came to a sobering conclusion.
On average, they found, investors failed to beat the market. And those investors who traded the most, it transpired, did even worse, earning an annual return of 11.4%, in a period in which the market returned 17.9%.
If in doubt, sit on your hands
Nobel prizewinner Daniel Kahneman, who with his colleague Amos Tversky laid the bedrock on which a lot of behavioural economics is based, summed-up their research in his 2011 best-seller Thinking, Fast and Slow.
“On average, the shares that individual traders sold did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the trades… It is clear that for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came to their minds.”
Cruel, perhaps. But true. From what I see, investors’ mistakes are generally when they do something. And quite often, not only is doing nothing at all likely to be the safer course of action, it’s also the correct one.
A profit warning does not require you to sell your shares. Neither does a gloomy analyst’s report. Or Brexit. Or fears about possible regulatory action that may never materialise.
Six months on… a year on… five years on… most of the time, whatever it was that you were worried about will have long since been forgotten.
Constrained horizons
Yet there’s one particular – and pervasive – investor error that doesn’t revolve around doing something. Instead, it’s about not doing something. And in particular, not casting your investing net further afield, and investing in businesses and economies beyond the UK’s borders.
There’s a term for it: home country bias. Because it turns out that many – if not most – investors are reluctant to invest outside their own countries. In other words, if a particular share isn’t listed on their own domestic stock exchange, they’re unlikely to own it.
For Americans, this might – just – make some sort of sense. But it doesn’t for any other nationality, and certainly not for us Britons. The London Stock Exchange, last time I looked, accounted for less than 5% of the world’s total stock market capitalisation. Put another way, over 95% of the world’s investing opportunities are listed elsewhere.
You might imagine that there are practical reasons why home country bias is so pervasive. Currency issues. Stockbroking issues. Taxation or regulatory reasons. Or language issues – fancy reading a company report in German, Japanese, or Mandarin? I know I wouldn’t (or couldn’t, for that matter).
Yet for the most part, these barriers don’t exist. Even language barriers, on closer inspection, turn out to be a chimera: a huge number of company reports, from all over the world, turn out to be published in English as well.
Not invented here
Moreover, investing overseas allows investors to gain exposure to businesses – and industries – that simply either don’t exist in the UK, or don’t exist at any scale.
Germany’s industrial giant Siemens, car and truck manufacturer Daimler, or chemicals specialist BASF, or instance. France’s construction materials firm Saint Gobain or aerospace manufacturer Airbus. America’s aircraft manufacturer Boeing, its software giants Google and Microsoft, or its online retailing giant Amazon.
Nor is it necessary to hold such shares directly, although it is usually cheaper to do so. Investment trusts, traditional index trackers, ETFs – these offer an easy and accessible investing route, as do UK-quoted ADRs, where available.
The FTSE is a great wealth-builder. But never forget that it’s not the only wealth-building game in town.
