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Getting outside the investing comfort zone

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Every investor whose portfolio includes directly selected stocks and various other traded securities will endure stretches of wondering if things are going adrift.

All the news says the market is doing well, so why am I going nowhere, or, worse, backwards? Too often investors will keep their doubts to themselves, leaving them to compound over years into losses that only tempt them into riskier strategies.

The biggest reason to talk to others is to challenge “confirmation bias”, the habit of paying attention only to news or views that agree with an investor’s beliefs.

“It’s easy to get caught up in our own bubble, only reading and listening to information that supports our own view,” says Ophir Asset Management co-founder and senior portfolio manager Andrew Mitchell. “This can be really dangerous.”

It takes courage to admit when you need help. Professional money managers know all about this, of course. There is nowhere to hide when their results are published and ranked among peers. In a sector known for its eclectic mix of egotists and eggheads, how do fund managers seek input from others?

One step is to diversify your investment news feed. Web browsers and social media apps are all set up to show information that is similar to other things the user has already looked at, Mitchell says, creating a feedback loop.

“You really need to be challenging your investment strategy and thesis behind each of your investments. If you throw rocks at them and they still stand up then they are more likely to be right and stand the test of time.”

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Mitchell suggests testing ideas with “intelligent people you respect who disagree with you”. They may benefit equally from a jousting session.

Healthy discussions sometimes include a little friction, or course, but First Sentier Investors co-head of multi-asset solutions Kej Somaia says that can be a good thing.

“Opposing views are needed to test the strength and conviction of an idea,” he says.

“Discovering that you may be wrong is only part of the story; having the flexibility to change your mind when you realise you are wrong is even more important.” Alternatively, an opposing view that is well refuted can help provide more confidence in your thesis.

Somaia puts forward a checklist to test whether investment objectives are properly defined:

  • Is capital invested for growth or to provide income?
  • What is the investment horizon?
  • Is there a real-return target or required level of income?
  • How vital is liquidity; are there any tax exemptions?

When a portfolio is scrutinised, fundamentals can be useful interrogation tools. Mitchell suggests this list:

  • The size of a company’s addressable market and how fast it is growing
  • The company’s growth rate within a market and market share
  • Is market share growing and is that growth sustainable?
  • Is the company generating cash or burning it (if so, how long can its balance sheet support that)?
  • Is return on capital higher than cost of capital?
  • How fast are earnings growing?
  • What does its valuation look like compared to its own history, the market and its peers?

Mitchell recommends investors go out of their way to find information sources that disagree with their views on investment strategy and individual stocks. “This will force you to challenge your own thinking and stress-test it.”

Does debate among fund manager colleagues ever get heated? “A great saying I heard once is: ‘emotive arguments are for wimps,’” he says. “Look, it’s great to be passionate in investing, but if there is no substance it is not going to get you far.”

Any work that develops a philosophy and a structured approach to implementing a strategy will help protect a portfolio from potentially damaging emotional decisions, Somaia says.

“Dedicating more time initially to portfolio design can reduce time and energy in managing the investment strategy,” he says.