Investors today appear to be suffering from chronic ADHD when it comes to their portfolio, observes James Montier in ‘ The Little Book of Behavioral Investing: How not to be your own worst enemy ’ ( >www.wiley.com ). The abbreviation, for starters, is of ‘attention-deficit hyperactivity disorder,’ a neurodevelopmental disorder, primarily characterised by the co-existence of attentional problems and hyperactivity, with each behaviour occurring frequently together, informs Wikipedia .
Montier depicts the problem with the help of a chart showing the average holding period for a stock on the NYSE, between 1920 and 2005. “Today the average holding period is around six months! In the 1950s and 1960s investors used to hold stocks for seven or eight years.”
At a one-year time horizon, the vast majority of your total return comes from changes in valuation – which are effectively random fluctuations in price, he reasons. “At a five-year time horizon, 80 per cent of your total return is generated by the price you pay for the investment plus the growth in the underlying cash flow.”
Left, right, centre
Investors have a distinct bias towards action, finds Montier. Not only do they desire quick results, they also love to be seen as doing something, as opposed to doing nothing.
This is an unfortunate tendency observable also among soccer goalkeepers, he says, citing a recent study of more than 300 penalty kicks from top leagues and championships worldwide. “A panel of three independent judges was used to analyse the direction of the kick and the direction of movement by the goalkeeper. To avoid confusion, all directions (left or right) were relayed from the goalkeeper’s perspective,” the author narrates.
A relevant statistic is that in the average soccer match 2.5 goals are scored, so a penalty (which has an 80 per cent chance of resulting in a goal) can dramatically influence the result of the game. The stakes are, therefore, high, with a kicker operating 11 metres from the goal, and the goalkeeper who cannot move from his line until the kick has occurred.
The urge to act
What did the researchers find? That the kicks were equally distributed with about one third of the kicks aimed at the left, centre, and the right of the goal mouth, reports Montier. “However, the keepers displayed a distinct action bias: They either dived left or right (94 per cent of the time), hardly ever choosing to remain in the centre of their goal.”
They would have been much more successful if they had just stood in the centre of the goal, saving some 60 per cent of the kicks aimed at the centre, far higher than the saving rate when diving either left or right. Yet, the reasoning from the goalkeepers’ side is that at least ‘they feel they are making an effort when they dive left or right, whereas standing in the centre and watching a goal scored to the left or the right of you would feel much worse.’
Alas, the investors are perhaps no different. More perilously, as the author notes, the urge to act tends to intensify after a loss, a period of poor performance in portfolio terms.
Wait for the fat pitch
Holding cash can be uncomfortable, but ‘not as uncomfortable as doing something stupid,’ reminds a quote of Warren Buffett, mentioned in the book. Wait for the fat pitch, advises the Sage of Omaha.
But waiting can be tough for those addicted to bubblevision, those who ‘expect investing to be exciting.’ Wait, investing should be more like watching paint dry or watching grass grow, counsels Paul Samuelson. “If you want excitement, take $800 and go to Las Vegas, although it is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.”
Montier wraps up his ADHD chapter with an approving reference to Blaise Pascal’s fret – that all men’s miseries derive from not being able to sit in a quiet room alone. “Alternatively, as Winnie-the-Pooh pointed out, ‘Never underestimate the value of doing nothing.’”
Recommended antidote to hyperactive investors.
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