How Greek mythology can make you a better investor

Nicholas Grove  |  07/12/2016Text size  Decrease  Increase  |  

Nicholas Grove: I'm Nick Grove at the Morningstar Individual Investor Conference in 2016 and I'm joined by Morningstar's Dr. Steven Wendel. Steven, what are some of the key behavioural biases that most afflict investors around the globe?

Steve Wendel: Absolutely. Unfortunately, there are many, but a few of them are particularly important. The one that we all struggle with and have the hardest time with often is overconfidence, the belief that we can beat the market. Of course, if you ask investors, all of them say that, which is impossible. And it takes us into risky positions, to risky sides of trades that we really shouldn't be getting into.

In addition to that we have a real challenge with what's seen as a recency bias that when we see the past performance of a fund, of a stock, et cetera, we believe that that is a natural predictor of the future. Because in everyday life, it's a great predictor. But in investing, of course, we know past performance does not predict future performance. The reason they have that is because we're hardwired to believe that it will continue in that way.

Now, in addition to that some of the other challenges that investors struggle with, what's known as descriptive norms or herding, which is, if you see a lot of people who get excited about a particular fund or stock, you naturally become so as well, which of course, in investing is a horrible idea. It means in many cases that the price has already been overbid and it's bad to enter. We see the same thing in reverse, when it's a terrible idea to exit when everyone else is as well.

Grove: And what are some of the strategies that investors can employ to overcome these biases? And I love the story and the concept of what you call the Ulysses contract. Can you just elaborate on that a bit?

Wendel: Sure. There are two main strategies. Ulysses contracts are about taking our moments of strength when we're planning out our investment strategy, when we're thinking through really what do we want to do in the future and then using that moment of strength to bridge us through to the moment of weakness, when we're likely to be tempted, when the markets are going crazy, et cetera.

And so, one example of the Ulysses contract is to, well, lock yourself in to a long-term investment and say, contractually, I cannot sell this for 10 years. Other ways of doing it are to create friction in your life to make it harder for you to make that foolish mistake. One would be to say if you're working with an advisor, for example, to have your advisor only honor your trades after three days or to require that your spouse be present. Added friction again makes it harder and you prepare by telling your advisor or telling yourself in some cases, all right, I can't do this without that extra time or extra person.

Grove: Steven, thanks for your time today.

Wendel: Absolutely. Happy to be here.

Grove: I'm Nick Grove with the Morningstar Individual Investor Conference in 2016.

Video Archive...

When is the right time to buy stocks?
29/03/2017  Davis' Associates Chris Davis says the best time to invest is when you have the money, and to ignore market "noise".
How misinterpreting risk impacts financial returns
28/03/2017  Dr Gerd Gigerenzer says fund providers need to invest in education so that savers are better equipped to deal with risk--and can make better financial decisions.
Are European stocks overvalued?
27/03/2017  Isabel Levy of French asset manager Metropole Gestion explains how she uses fundamental industrial analysis to avoid value traps and identify the fair value of European equities.
Which funds are worth paying for?
23/03/2017  High active share funds--that is, those managers who take off-benchmark bets--outperform those which are low active share. So, ban closet trackers from your portfolio.
Bond market wobbles no cause for panic
21/03/2017  Australian bonds see only a slight tremor in response to the Fed's rate rise, says John Likos, Morningstar's senior credit analyst, who also provides insights on the new, and anticipated, hybrids from Australian banks.
ESG: Essential steps for successful long-term investing
21/03/2017  Want sustainable long-term returns? Morningstar UK reveals the essential components and the fund providers who are getting it right.
Few values left in global stock market
20/03/2017  Morningstar's directors of equity research think investors need to be cautious in the market today and offer some of their best investment ideas.
Why the time is right to invest in emerging markets
20/03/2017  Hilde Jenssen from Norwegian fund manager Skagen admits that emerging markets have disappointed investors over the past three years--but says valuations are attractive and reforms are boosting returns.
Johnson: Fed's path may not be smooth
16/03/2017  The Fed's plan for stair-step rate hikes in the coming years will likely be derailed by economic reality, says Morningstar's Bob Johnson.
First-half 2017 earnings season insights
15/03/2017  Companies produced reasonably good results overall with only a few standouts, even as a cost-out theme dominated, says Peter Warnes, head of equities research, Morningstar.
The growing appeal of LICs
06/03/2017  The popularity of listed investment companies is on the rise once again, but there are several things investors need to be aware of before buying in, explains Michael Malseed, Morningstar senior analyst, manager research.
Earnings season wrap: BHP exercises good cost control
27/02/2017  As the curtains close on the 1H17 reporting season, BHP books earnings that are slightly softer than expected, while Woolies takes market share at the expense of margins.
Possible $2.5bn tailwind to drive hybrid demand in 2017
22/02/2017  Strong supply dynamics and ongoing economic stability should create significant opportunities for hybrid investors in 2017, according to John Likos, senior credit analyst, Morningstar Australia.
Earnings season wrap: Telstra feels competitive heat
17/02/2017  As the 1H17 earnings season rolls on, Wesfarmers posts a bumper profit, Newcrest restores its interim dividend, while Telstra's profit falls as it feels the heat of intense competition.
Earnings season wrap: Rio Tinto's dividend surprises
10/02/2017  Rio Tinto delivers a surprise full-year payout of US$1.70, NAB records a soft first quarter, and CIMIC posts an annual net profit in line with Morningstar's expectations.
Leveraging the opportunity of international students
07/02/2017  Co-founder and CEO of Navitas, Rod Jones, explains the firm's business model, which is built largely around international students and university partnerships.
Xero CFO gives outlook for 2017 and beyond
02/02/2017  Sankar Narayan, chief operating and financial officer of accounting software firm Xero gives his insights on the company's business model and outlook, with Morningstar analyst Gareth James adding his views
Asia growth engine not threatened by Trump, says Barings
30/01/2017  Long-term investors in China and wider Asian equities should not worry about President Trump, says Barings head of Asian equities Hjung Jin Lee.
Shifting fortunes for ANZ, more of the same for CBA in 2017
12/01/2017  Australian banks are well-positioned as they head into 2017, with ANZ moving from least profitable in 2016 to become one of the sector's top performers and CBA remaining an investor favourite.
Is Trump a threat to emerging markets?
12/01/2017  Is President Donald Trump a threat to emerging market returns? Paul Jackson from the UK-based Source ETF considers the outlook for sector and where investors can find the best opportunities.