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Never base any investment decision on a single month of data

Focusing on a single year of fund performance is bad enough so be very wary of anybody claiming to be able to draw meaningful conclusions from just one month of data

23/03/2018

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

At a time when information has never been more plentiful or easy to access, it is a continuing irony that too much of it can actually work to the disadvantage of investors.

Take a recent story by an oft-quoted market commentator that ran in a specialist investment magazine – since we are about to be less than complimentary, we won’t name names – which, for its length, featured a strikingly high number of behavioural finance sins.

The piece essentially focused on the best and worst-performing funds and fund sectors in the preceding month and offered some commentary on why some investments had prospered and others had not.

“During the month, technology funds did well thanks to the sector’s ability to generate growth irrespective of the economic climate, which made them a defensive play,” it ran.

“On the other hand, gold and commodities funds struggled after a rebound for the US dollar and fears of a slowdown rose, which would affect commodities demand,” it continued.

“The strength of the US dollar also weighed on UK equities and, as sterling investments offered no currency protection for investors, the three worst-performing sectors all focused on UK equities,” it concluded. And that was pretty much it.

Is this analysis useful? 

Look – maybe the commentator nailed it, pinning down the major drivers of world markets in a few sentences and yet, here on The Value Perspective, this sort of ‘analysis’ makes us very nervous indeed.

As we  have argued in articles such as Two sides to every story, we do our utmost to avoid imposing any kind of narrative on any investment because it only serves to distract from an objective assessment of its risk and reward.

Aside from the broad danger arising from such ‘narrative fallacy’, the one-month timescale involved in the commentary strikes us as bizarre.

Bolting any sort of story onto a year’s performance is dangerous enough – not that that stops people doing it – but trying to do so in the context of a single month is … well, let’s just say this is not the way we believe anyone should be thinking about their investments.

A bad influence 

In Less is more, we discussed an experiment by economics Nobel laureate Richard Thaler, which demonstrated the way financial information is presented can affect people’s investment choices.

We then highlighted an odd instance of life imitating academia – where a leading pension fund in Israel changed the front pages of its reports so they showed performance data for the previous year rather than a single month.

The weight of equities in the average pension scheme subsequently edged upwards and, while we would of course be wary of imposing our own narrative on why this might have been so, it was generally attributed to investors worrying less about market volatility.

Perhaps, in due course, UK investment businesses will extend their investment horizons and how they discuss them in the same way that pension fund did.

Ultimately, here on The Value Perspective, we can only look to our own behaviour and, with so much information in the world – and by extension so little time to consume and make sense of it – we prefer to focus on the things we know we can do well.

That means spending a great deal of time trying to understand the potential rewards of buying into businesses alongside the risks of doing so.

What helps us adhere to this value-oriented investment strategy – and to a much longer timeframe than most investors are prepared to live with – is the 100-plus years of data that underpins it.

This tells us that no matter what information and accompanying narrative is being served up across so many different media, what really matters is valuation and balancing cheaply valued assets against their associated risks.

The rest is just noise.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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