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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Behavioural edge and not new ideas

Posted by Muthu on January 29, 2017

Many investors are always keep looking out for new ideas. They want to play the momentum, trends, fads and fashions. They want quick returns and multiply wealth fast. Some are successful in this. But many fail. As I always keep repeating, investing is one area where frequent decisions would be harmful and lead to sub-optimal returns.

Not only investors of stocks, even mutual fund investors keep looking out for latest performers, NFOs, trending themes or sectors etc. This leads to frequent change of portfolio. We’ve seen how an average mutual fund investor holds a fund for only 18 to 24 months. Though 10 or 20 year returns of many funds are good, very few investors actually get this return.

As individual investors, our biggest edge is our behaviour. Holding for a long period, having enormous patience, not timing and ignoring volatility are some of the traits which would bring us superior returns. These traits would make you better than 99% of investors out there.

For last 10 years, I’ve been interacting with lots of investors – both stock pickers and mutual fund holders. More I see, the more I’m convinced how rare these traits are.

It is very difficult to have an analytical and informational edge. There are lots of people with very high IQ in the markets. The kind of information investors have both through free sources and also through paid subscription services is very high. But many of these analytical and informational stalwarts, lacks behavioural edge. That is where you can score.

As I’ve explained, a dozen quality companies or five diversified equity funds backed by a strong behaviour are all you need. Over a 10 year period, you’ll beat most of the investors. Though our intention is not to beat others but only achieve our goals, patience and longevity of holding would ensure you have a strong edge over others.

I’ve written in the past about Nick Train and Terry Smith, two good fund managers of UK. On an average, Nick Train holds a stock for 18 years. There are many years where he does not buy or sell a single stock. There is nothing mystical about his holdings. His portfolio consists of well known, quality companies. Anybody can create such a portfolio. But only few can hold such portfolio for decades with no activity in between.

There is no need to go for new ideas or new funds. Changes in portfolio can be made, but only rarely. What you need to focus is on your behaviour. If behaviour is right, everything would be right. That is your biggest edge. Don’t lose it.

There is huge competition on analytical and informational edge. There is very less competition on the behavioural edge. Go for it.

2 Responses to “Behavioural edge and not new ideas”

  1. BKPR said

    Yes, creating wealth is a long term process

  2. taunk said

    I think it’s very apt.Things are so simple of we control our behavior but we seek thrill in investing. This leads to sub optimal returns via selling/buying unnecessarily.

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