We recently came across the following article written by Australian value investing legend, Roger Montgomery.
Below is a snip it, we encourage you to read the full article on LiveWire!
DALBAR is a leading research firm who for 21 years have been researching investor behaviour through their annual Quantitative Analysis of Investor Behavior study measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds over both short and long-term time frames. What follows is evidence that investors can be their own worst enemy and they should fear themselves more than any economic crisis or market correction.
Investors tend to do the opposite of what works in investing. We have all always intuitively known that investors tend to buy at the tops and sell at the bottoms. And now, after more than 20 years of reporting on investor behaviour, that observation can be confirmed as fact.
Today, in Australia, investors are mortgaging themselves to the hilt to chase ever-increasing prices for real estate. This, even though record credit card and mortgage debt suggest they can least afford it, and private debt is at record highs. But relief is in sight because it is not the case that record prices and record supply can coexist.
In the stock market, investors have herded themselves into a corner chasing yield and making the most expensive companies those that distribute the most in dividends…but retain the least for growth. Historically low interest rates have also ensured that the Weighted Cost of Capital (WACC) calculation has rendered companies with the most debt, the most expensive.
Historically low interest rates have corrupted investors understanding of risk ensuring they accept bond-like returns or even lower-than-bond-like returns, but take on equity or property market risk. Once again this concoction has never ended well.
Meanwhile, thanks to the faddish behaviour of large institutional investors who found themselves underweight banks and resources right at the moment Trump was elected and iron ore prices started to surge, midcap high-quality and high-growth companies have been sold off – many, as much as 50 percent. The selloff was instigated by large institutional managers that required cash to fund a move back towards market weights in the banks and resource companies.
If there is one criticism, commonly levelled at the quality and value philosophy we are proponents of, it is that quality is easy to identify and rarely cheap. Well, here we are with companies like Healthscope and REA Group down as much as 30 percent in just a few weeks.
What this Whitepaper highlights is that investors rarely see an opportunity for what it really is.
In preparation for 2017 and beyond – which will be interesting (expect bond rates to continue climbing) – this Montgomery Whitepaper seeks to arm you with knowledge of yourself and the real impact of your decision making, ruled as it is by emotion.