Value investing skills #3: Behavioural edge

There are arguably four broad categories where it is possible for investors to enjoy some sort of advantage over their peers. Here we consider the behavioural ‘edge’ and how value investors can benefit from one



Kevin Murphy
Co-head Global Value Team

So far, in Value investing skills #1 and Value investing skills #2, we have highlighted the informational and analytical ‘edges’ to be had through a value approach to investing. Having done all the hard work identifying the investment pool you want to fish in and assessing the quality of what you find there, you next have to make a decision on whether to buy.  This is where value investors can enjoy a behavioural edge.

#3 - Behavioural edge

You can be the best company analyst in the world but it is the specific investment decisions you make that determine whether or not you outperform the market and your peers.

Did you buy or did you sell a stock? At what point? How much of it did you choose to trade? And, most important of all, how consistent were your decisions this time compared with every other time you have bought or sold a business?

Leave emotions at the door

Say you had decided you wanted to buy into a company yesterday but do not like the look of it so much today, then you have more than likely allowed emotion to encroach on your investment process – and emotion is the enemy of an edge.

To have an edge in this part of your process, you need to have a consistent decision-making framework – and that means acknowledging the human behavioural aspect of investment.

It is totally understandable why emotion can creep into any investment process. The decision of whether or not to buy into a company is an extraordinarily difficult one.

You are looking to evaluate all sorts of things about the business – its valuation, its financial strength, the quality of its management, competitors, suppliers and so on – and trying to distil all that into a simple yes/no answer. All in your head. Your human head. 

Beware the human brain

The trouble is, the way the human brain has evolved over so many thousands of years means that, when we are faced with a difficult question, it will perform a little sleight of hand.

Behavioural psychologists such as Daniel Kahneman have shown our brain will switch the question from ‘Should I invest in this company?’ to ‘Do I like this company?’ – and it does this so subtly you do not even notice.

Unless of course you understand in advance that is the sort of trick your brain can pull and so take steps to make the question simpler and thus your investment process more consistent. When we are looking at companies here on The Value Perspective, for example, we split the question into two:

  1. What are the associated risks of buying into a business?
  2. What are the potential rewards?

This has the effect of turning that initial, key question – ‘Should I invest in this company?’ – into a much easier decision to make and one that can be made in a much more consistent way.

It is this sort of consistent process and reducing the potential failures of human behaviour that, we would argue, could give you an investment edge over others. 


Subscribe to our Insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.


Kevin Murphy
Co-head Global Value Team


Behavioural finance
The Value Perspective
Follow us

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This marketing material is for professional clients or advisers only. This site is not suitable for retail clients.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.