Role of behaviour in long term investment performance (September 18, 2016)

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Investor behaviour is as much a determinant of long term investing success, as a fund manager’s skill in building a portfolio.

The charts below illustrate this for three companies from different industries.




The casual observer will express admiration for a fund manager on the multi-bagger returns earned.


A more thoughtful observation will reveal the pain an investor has to be willing to bear to earn these returns

  1. The starting period of the investment saw almost flat returns
  2. There were periods where the stock saw an exponential rise; followed by a stretch of significant pull backs
  3. There were long periods intermittently when the returns were flat
  4. Even if one paid 2X or 3X the entry price, results would have been stellar

It require nerves of steel to keep the faith and stay invested for such long periods of time.  But this is THE key driver of long term returns once you have made a call with conviction.    No point making a great investment call, but not giving it time to play through.

As your fund managers, we don’t remain immune to the temptation to sell when we see significant market declines (unfortunate, but true !!) .  Our “reptilian” brains trigger impulses to protect capital.  Successful investing requires us to act against the natural instincts of the brain.


We need to keep reminding ourselves that stock prices do not behave rationally, especially in the short term.

  • Take the example of Brexit.  It was supposed to trigger significant uncertainty and commentators out did each other on bearish forecasts.
  • However, the markets are 12% higher post the Brexit decision.


Having an investment strategy that buys quality companies reduces the risk of selling in panic.  One will have greater confidence that a falling stock price reflects current market sentiment and not a governance issue or challenges to a business model/earnings growth? Stock prices of quality companies are also unlikely to fall like a knife through hot butter.


Our behaviour is likely to be tested in the months ahead.  Indian markets are trading well above average multiples; there is uncertainty of policy action in the developed world, and the pace and broad nature of earnings recovery in domestic markets is under question.


However, quality companies should continue to deliver earnings growth despite the uncertainty; and while in the short term stock prices MAY creep down, their longer term trajectory will be to follow earnings growth.   Stay the course.

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