Value Investing: Tools and Techniques for Intelligent Investment

Chapter 17. Beware of Action Man^[17]

What do goalkeepers facing a penalty and investors have in common? The answer is that both are prone to action. They feel the need to do something. However, inaction is also a decision. There are times when holding cash is perfectly acceptable, but this remains an anathema to many fund mangers. Perhaps they would be well served to remember Samuelson's advice that 'Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow.'

• Imagine you are goalkeeper facing a penalty kick. You have no idea which way the penalty taker will choose to direct the kick. You effectively make your decision simultaneously with the kicker. Should you dive left, right, or stay where you are in the centre of the goal?

• Most professional goalkeepers tend to dive either left or right. Indeed diving in one or other direction is the preferred action in a staggering 94% of cases. However, this is not the optimal solution. If you look at the percentage of penalties saved then it becomes clear that the optimal strategy (assuming no change in the behaviour of the kickers) is to stay in the centre of the goal! Goalkeepers display a distinct action bias.

• Evidence from experimental markets suggests that investors also display an action bias. For instance, an artificial market where fundamental value is easy to calculate and the resale of a share is prohibited, should display no trades above fundamental value. However, time ...