"Well, money's coming in… even though there's been a drop"
Bingo. I pulled out my phone and typed it in, word for word.
The money in question is dividend payments.
The drop in question… well, I don't need to tell you that it's been a tough few weeks for share prices.
This morning alone the ASX is down 5%.
And the person in question?
No, not a fund manager.
Not a 'Dow loses 1,000 points' headline writer.
Not a social media Coronavirus expert.
So who was it?
A family member, already in retirement.
The words were spoken with absolute calm.
See, they get it.
They're not trying to play some sort of short-term guessing game.
They're not trying to time exits from the market, or re-entries.
They are focussed — say it with me — on the long term.
Sometimes, it seems to me, the more you know, the more complex you tend to try to make a simple situation.
I want to share something with you, from James Montier's excellent book, The Little Book of Behavioural Investing:
"In one study, 25 eight experienced bookmakers were shown a list of 88 variables found on a typical past performance chart of a racehorse (e.g., the weight to be carried, the number of races won, the performance in different conditions, and so on). Each bookmaker was then asked to rank the pieces of information by importance. Having done this, the bookmakers were then given data for 45 past races and asked to rank the top five horses in each race. Each bookmaker was given the past data in increments of the 5, 10, 20, and 40 variables he had selected as most important. Hence each bookmaker predicted the outcome of each race four times — once for each of the information sets. For each prediction the bookmakers were asked to give a degree of confidence ranking in their forecast.
"With five pieces of information, accuracy and confidence were quite closely related. Sadly, as more and more information was made available, two things happened. First, accuracy flat-lined. The bookmakers were as accurate when they had five pieces of information as when they had 40 items to help them. So much for more information helping people make better decisions.
"Secondly, the degree of confidence expressed in the forecast increased massively with information. With five pieces of information the bookmakers were around 17 percent confident; by the time they had 40 items of information, confidence had exploded up to more than 30 percent (without any improvement in accuracy, remember!). So all the extra information wasn 't making the bookmakers any more accurate, but it was making them increasingly overconfident."
In other words, the more they knew, the more confident they were… even though their accuracy didn't improve!
Now turn your attention to people with fancy Bloomberg terminals. How much information do you think they have?
How long do you think they spend thinking through 1,000 permutations and data points?
How many complex scenarios have they constructed?
And — most importantly — how overconfident do you think that makes them?
No, I'm not trying to make my peers look bad. I don't personally know of anyone in my industry who isn't doing their level best to succeed for themselves and their clients.
But you have to wonder if they're trying a little too hard?
The volumes on the ASX recently have been huge. Plenty of shares are being traded.
And remember, next time you hear about a 'wave of selling', there's always someone doing the buying — so the whole market is not selling with abandon.
Yes, the abundance of 'motivated' sellers is pushing prices down, but someone else is still buying those shares.
Both groups think they're right — or they wouldn't make the trade.
Here's my question: Are you really, really likely to make money trying to 'trade' the Coronavirus outbreak?
And here's the problem with that question: if you're in the group above, you've already answered 'yes', because you just know you're right!
After all, you have all of that data, and you've done all that thinking…
And, like drivers, I'm pretty sure 90% of professional investors think they're smarter than average. You see the problem there, right?
So let me ask a couple of extra questions:
1. Are you really an epidemiologist?
2. If you're not, which experts are you listening to? And why?
3. Do you really know how long this outbreak lasts?
4. Do you really know how bad it gets?
5. Do you know how the market will respond? How long it'll remain pessimistic for? How bad the fear will get?
6. Just as — or more! — important, how will you know where the bottom is, and when to buy back in?
And let's say you think you know those things. Here's the kicker:
7. What's your track record of being right about all of that stuff and trading it profitably?
Did you 'trade' Brexit? Trump's election? The Chinese hard landing?
Did you do it successfully?
You did? Great — you're a genius. Trade away!
But if you didn't?
Why are you trying to do it now?
My guess is because, evolutionarily-speaking, doing something beats doing nothing.
We're used to acting. It makes us feel better.
And hey, on the African savannah, that was a very good idea.
There's no benefit in stopping to make sure that really is a lion. Running first and asking questions is a good idea.
But for investors?
Where more than a century of history suggests that investing is a net-positive endeavour?
You have to try very hard — and be very selective in your data gathering — to find a time when remaining invested (and regularly adding more money to your portfolio) was a bad idea.
And, for those 'experts' who manage to unearth some data that shows it's not always the case, congratulations.
But are you really going to hang your investing hat on the very improbable over the very likely?
I mean, it's your choice.
But really?
Remember: investing is about probabilities. And about the return when you're right, and wrong.
If you sold out in 2018, you missed a 25% gain last year.
Even after this morning's falls, you're still ahead.
But it doesn't feel like it, does it?
If you take away the data terminals, the complex formulae and the egos, here are the two questions every investor should answer for themselves:
Is the long-term future likely to look better than the present?; and
Do I have a (statistically sound) track record of successfully timing the market?
I don't know anyone serious who thinks the answer to Question 1 is 'no'.
And I can't think of anyone who can answer the second question with 'yes'.
So?
Well, I'm still fully invested.
More than that, I've been buying shares.
Because it's the bottom? No.
Because things can't get worse? No.
But because anyone with humility has to subvert their egos to the weight of evidence.
And the evidence suggests that, over the long term, the stock market is far, far more likely to create wealth than not, just by staying invested and adding regularly.
It'll be rocky. It'll be bumpy.
It might even be scary.
But the alternative is betting against history.
My suggestion: Follow my relative's lead. Relax, focus on the income, and invest anyway.
Fool on!
