From 1999 to 2009, the CGM Focus Fund managed by Ken Heebner produced a compounded return of 18% per annum. However, during that decade the fund’s average investor lost 11%, according to a recent study. How could that possibly happen? Most investors bought the fund after periods of strong performance and sold the fund when performance was down. Meanwhile, Ken Heebner stuck to his knitting and did great work. Sadly, most of the investors in the fund were not helped by his efforts. If this sounds like a familiar tale, it is because of investors’ increasing lack of patience.
Imagine an investment opportunity that will beat the market by 10% every year on average over the next 10 years. Here is the catch: you will have to “pay” for the outperformance with psychological pain. There will be several years of underperformance mixed into that 10-year period. “No big deal,” you might say now. In practice, however, most investors cannot stomach the pain once it moves from theoretical possibility to their actual brokerage statement. They reach their pain threshold and sell at just the wrong time, when things feel worst, eventually to buy back well after an optimal entry point.
Investors suffer from several critical psychological biases. Regret avoidance, known more commonly as fear of missing out, is one of the worst. This psychological bias manifests itself in trading turnover, and is apparently getting worse among investors. Investors are holding stocks for less and less time as the graph below shows.
In days gone by, investors were just as vulnerable to regret avoidance as today. However, with 24/7 availability of real-time information and constant focus on the indices, the grass can look greener much more often, simply by frequent comparison. Investors are constantly jumping in and out to try to not miss the latest or hottest opportunity, and tend to feel disappointed when they miss out on potential gains. Investment cycles and fads often change. The winners exercise patience and conviction whereas those who chase the fads and enter late end up constantly chasing the previous years’ winners to no avail. Denver Investments believes in holding stocks for a period of time that tracks improving corporate performance, something that is usually measured in years, not months. Indeed, it appears as if “investors” these days are acting more like traders.