Clearly, the behaviour penalty is not a good outcome for either fund managers or their clients, so why does it persist? Much of the blame rests with human nature. We are wired for survival and our instinct is to seek the comfort and safety of the herd. While this served our primitive ancestors extremely well, it unfortunately does us very little good as investors.
Although this is a timeless lesson, it is arguably even more critical for investors to understand at a time when many global markets are trading at elevated levels.
Markets have been remarkably pain-free in the years since the global financial crisis, but this cannot continue forever.
Many areas of the stock market look increasingly expensive, and we are likely to face an extraordinarily challenging investing environment in years to come.
Patience matters
We cannot predict the future, but it is safe to assume that we will all be tested. The behaviour penalty reminds us that our response might make the difference between success and failure.
We believe that one of the best things an investor can do is choose a manager who they believe in for the long term, be patient, and resist the temptation to make emotional decisions based on short-term results. As long as your interests are aligned with the manager, and the manager continues to do what you hired them to do, the results should take care of themselves.
Dan Brocklebank is head of UK at Orbis Investments
