Investing for the Long Term

CHAPTER 9The Irrational Investor Lurking Within Us All

Yes, all of us. Investors, fund managers, even myself; we are all prone to behave irrationally to a greater or lesser degree. We have pretty clear objectives, such as maintaining the purchasing power of our savings, but we're incapable of making rational use of the tools that help us to achieve them. Historically, our irrational behaviour has led to volatility that has little to do with the performance of underlying assets, especially at turning points in the markets.

Funnily enough, in our ‘business’ the customer isn't always right: they invest at the top and sell at the bottom, hampering their ability to obtain returns, which tend to underperform the market average over the long run. This isn't just an opinion. Look no further than mutual fund inflows and outflows.

The goal of this chapter is to get to know ourselves better, with the aim of constraining our dark and crazy side, which drives us to act without thinking, or worse still, to do something which runs contrary to our interests.

• Why do we still believe that fixed income is safer than equities, despite all the evidence to the contrary?
• Why do some investment strategies systematically obtain better results? Why don't we make the most of them?
• Why do some fund managers repeatedly outperform the market?

Responding to these questions requires us to review the research ...