35 years on from the big bang
On Monday 27 October 1986, the London stock market was deregulated. In a matter of hours, a once...
I love to read, and I read a lot. For as long as I can remember I’ve always read between 70-100 books each year. 2019 was my best year with 107, but in 2020 I only managed three. Working from home, without a commute, my reading time vanished without me even realising.
So last week I bought myself a Kindle and found a different time in the day to indulge. I’ve read six books already. I think it’s fair to say I missed reading.
My current book is called ‘The Psychology of Money’ by Morgan Housel. The book outlines 20 biases or beliefs about money that most people have and the strange behavioural ways that people think about money. It’s fascinating. I was hooked from the introduction: “Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people.”
‘Financial success is not hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.’ — Morgan Housel, The Psychology of Money
I’ve said it before and I’ll say it again, you do not need to be good at maths to understand money – or investing! Money, investing, financial independence… to me it’s a combination of Year 6 maths and a PhD in Psychology. As much as I wish I had a PhD in Psychology and human behaviour, I don’t. But I do read a lot about it and, in this case, I couldn’t agree more. My next statement will probably upset a few people, but I stand by it: investing is not the study of finance. It’s the study of human behaviour. It’s probably why I enjoy it so much despite having a completely different educational background.
The psychology of investing is often ignored by retail investors. The finance industry loves to throw jargon around and talk about market this and market that, politics, trade wars, etc. Yes, it’s important, but when it comes to your finances it’s just as important to understand that individual investors are at risk from a number of personal biases and falling into common behavioural traps.
If the last year has taught us anything, it should be that successful investing isn’t about winning all the time. It’s not a straight line. Sometimes, it’s about the psychological willpower to watch something fall in value but stick with it for the recovery. History also tells us that when fear is created, it can be an excellent time to invest for long-term thinkers.
Steven Andrew, manager of M&G Episode Income, uses behavioural finance to finds pockets of value and invests against the herd rather than following it. The term “episode” refers to those periods of time when investors’ emotions cause them to act irrationally. The investment process has been designed to prevent the manager falling victim to behavioural biases. The behavioural analysis on the fund makes it unique compared to its peers.
Brown Advisory Global Leaders doesn’t use behavioural finance directly in its investment process, rather the managers use a third party consultant to analyse their decision-making for behavioural errors. The team regularly challenges each other about their own behavioural biases when making decisions and is constantly striving to improve.
Ben Whitmore, manager of Jupiter UK Special Situations, uses the concept in his contrarian approach to investing. He believes that by understanding the role that emotions play in managing money, such as overconfidence, he can gain an edge and avoid many of the pitfalls that befall active managers.
Invesco Asian has a different philosophy. The manager believes the behavioural error of mixing up good businesses with good investments can often lead to trouble, so he uses a strategy designed to separate these two elements. As he says himself: “A share price is just the collective view of hundreds of human beings, who can often be unimaginative, over-emotional and too short-termist.”