People have often told me theres no point investing privately because its impossible to beat the professionals. But with only a few exceptions, that isnt true if you invest with a decades-long horizon and avoid simple mistakes, youll enjoy distinct advantages over most pros.
Short-termism is the pros biggest failure. Every year we see tables of the best-performing funds from the previous 12 months and previous three years. Is it any surprise that people almost always plump for those that have done the best? We see thepast performance is no guide to future performance disclaimer, but how else do we judge?
The thing is, that disclaimer really is true even if every investment manager picked shares randomly, one of them would be the best performer over 12 months, and one would be the best over three years! Competent investors (Warren Buffett and Neil Woodford spring to mind) eschew these annual rankings and leave it to investors to look to their longer-term performance and superior performance only really counts when it comes to decades.
Trading costs money!
To get ahead in the annual race, too many managers trade their portfolios too often, trying to get into the next hot stock if they miss this years big winner, theyll gain fewer customers for next year. That incurs extra costs and would you be surprised to learn that around three-quarters of all managed funds have failed to even beat the FTSE average long term?
We have to look beyond current funds to see this shocking statistic, because these City institutions have an unsavoury habit of closing down the worst performers, transferring their assets to new funds, and starting again with a clean slate. That leads to a distortion called survivorship bias, which makes still-operating funds look better than they deserve as so many have gone the way of the dodo and arent included in the latest statistics.
One outcome of the race to be this years best is the distasteful practice known as window dressing. If you ran a fund that was holding a few 12-month losers, you might not look so good at the end of the year. So what manydo, just before the end of their reporting period, is sell-off recent losers and buy into shares that have been flying so it looks like theyre holding winners.
That has two nasty effects. It increases trading costs purely for cosmetic purposes and with no real benefit. And selling shares that have fallen and buying ones that have risen is a pretty dumb strategy if thats all you go on. Its a way to lose out on undervalued shares witha recovery duein the near future, and a surefire way of finding overpriced junk thats up there just because its part of the latest fad.
Its easy to avoid
As private investors, we can avoid these mistakes. We should buy quality companies that we want to hold for the long term, and avoid whatever bandwagon fad-followers are jumping on. And it follows that we would be trading rarely and thus minimising costs. Pluswell have no need to make our portfolios look good over just the past 12 months or the past three years.
If you follow these principles, I think youd be unluckyto not beat mostof the professionals.
In fact, an approach like this probably gives you the best chance of becoming a millionaire that you’re likely to get.
If you don’t believe me, have a read of the Motley Fool’s 10 Steps To Making A Million In The Market report and see just how uncomplicated it can be.
The report won’t cure premature baldness, or make you attractive to the opposite sex (actually, if you do make that million, then you never know about that second point), but it is at least completely free – so click here to get your copy now.
Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
