{"id":2457,"date":"2021-12-17T12:17:09","date_gmt":"2021-12-17T12:17:09","guid":{"rendered":"http:\/\/www.assetmultiplier.co.in\/blog\/?p=2457"},"modified":"2021-12-17T12:39:01","modified_gmt":"2021-12-17T12:39:01","slug":"behavioral-oversight","status":"publish","type":"post","link":"https:\/\/www.assetmultiplier.co.in\/blog\/2021\/12\/17\/behavioral-oversight\/","title":{"rendered":"Behavioural Oversight"},"content":{"rendered":"

Anand Sridharan reminds investors that it is unfair to blame a fund manager for something that he\/she doesn\u2019t control (i.e. timing & quantum of flows in & out of fund). However, behaviour gap is real and hurts the average equity investor quite badly. Poor returns to the average investor are rooted in the following:<\/p>\n

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  1. Every investing strategy experiences (cleverly hidden) cycles<\/li>\n
  2. Size is enemy of returns<\/li>\n
  3. Substantial money tends to pile into a fund\/strategy late in an upcycle<\/li>\n
  4. Human nature and institutional (mis) behaviour exacerbate the above<\/li>\n<\/ol>\n

    Investing strategies witness headwinds & tailwinds<\/strong> –Odds are that valuation will be a headwind over next 15 years. As a corollary, future returns will be worse than past.<\/strong>\u00a0Only question is by how much. Without experiencing an inevitable downcycle for my approach, I cannot eliminate the possibility that I\u2019m just a lucky idiot with a hot hand. Headwinds and tailwinds are often cleverly hidden and can only be deciphered with hindsight after an entire cycle. This is why the\u00a0#1 criterion for judging an investor is longevity, not quantum, of outperformance.<\/strong>\u00a0Decades, not years, are required to separate skill from luck.<\/p>\n

    Size is gravity for returns<\/strong>– Investing strategies don\u2019t scale well, especially when inflows lead to step jumps in fund-size. Factors such as ability to build positions, liquidity, inefficiency or impact cost are very different at $ 1 billion AUM than at $100 million. The only peer-group at that size (pension & sovereign-wealth funds) has delivered single-digit long-term returns. Headlined time-weighted returns usually mix up big returns with small money followed by small returns with big money.<\/p>\n

    We\u2019re suckers for extrapolating recency<\/strong>– Predictions of asset or commodity prices are severely biased by recent movements. Naturally, those selling funds for a commission pile onto this ride as it\u2019s easier to palm off whatever\u2019s hot. Everyone, fund managers included, starts believing in permanence of recent success. Topical nonsense (e.g. valuation doesn\u2019t matter, this time is different) is extrapolated as timeless wisdom. Between misplaced expectations, inherent mean-reversion of any hot-hand strategy and size-effect, majority of inflows are set up for disappointment.<\/p>\n

    System doesn\u2019t help investors\u2019 cause one bit<\/strong>– Self-delusional fund managers on premature victory laps. Intermediaries\u2019 mis-selling products with ridiculous return promises. Investors not learning from history. Media cheerleading instead of cautioning. Disregard for fundamentals\/valuations being rationalized as new normal. What a fund manager does when one\u2019s strategy stops working is the acid test of investing.<\/strong><\/p>\n

    Anand Sridharan concludes that aforementioned factors aren\u2019t independent and feed on each other in unknown ways. What can a retail investor in institutionally managed funds do? Ideally, stick to systematic investment in passive index funds.<\/p>\n

    Source: Buggy humans in a messy world by Anand Shridharan<\/p>\n

    Asset Multiplier comments:<\/p>\n