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A couple of years ago, my partner James and I were driving along a winding country road in North Norfolk in the middle of summer. The sun was beating down and I was looking forward to reaching our destination so I could jump into the sea.
So I was furious when, as we approached a junction, a huge farm vehicle loaded with hay cut into our path, forcing us to slow down to a crawl. The next turn-off was 30 kilometres away, overtaking was too dangerous and we sullenly resigned ourselves to following along until then, frustrated and hot.
But after a couple of minutes, the vehicle suddenly swerved into a field, leaving the road ahead of me clear. I can’t tell you how surprised (and relieved) I was. I had been so quick to imagine that I would be spending 30 kilometres behind that damn vehicle that I hadn’t considered any other alternative.
This memory comes up again and again when I talk to fund managers about investments and the outlook for their sectors.
It’s a trap that investors fall into all too easily: we develop such a fixed view of what the road ahead looks like that it blinds us to the alternatives.
Changing tides: Rachel had resigned herself to a long wait before sampling the delights of Cromer.
Sometimes we are blindsided by changes that seem to come out of nowhere: a global pandemic shutting down entire industries or the war in Ukraine driving up energy costs.
But we can also be surprised by changes that, in retrospect, are as obvious as the fact that a farm vehicle can leave the road and enter a field. For example, the fact that pent-up demand post-Covid-19, as well as billions of pounds of government stimulus, will increase inflation.
Even the most prestigious fund managers can be surprisingly short-sighted.
By July 2021, Baillie Gifford European Growth Trust had almost doubled its investors’ cash in just two years, but its winning strategy of investing in high-growth companies backfired when interest rates began to rise. The value of its holdings fell and within a year the fund was virtually back to square one.
Fortunately, things have improved recently and have increased by about 25 percent in five years.
How then can we manage this inability to see plausible futures while investing successfully for the long term?
One option is to know your own weaknesses.
This is the approach taken by Mick Dillon, co-manager of the Brown Advisory Global Leaders fund. Over breakfast a fortnight ago, he told me that he and his co-manager Bertie Thomson keep a diary of their investment decisions and then meet with an adviser every three months to discuss them.
For example, their coach noticed that when the value of an investment falls by 20 percent, Mick and Bertie often write in their journals that they should take action, but then they don’t do it, and later it turns out that they should have.
So they set a rule that if an asset fell by 20 percent, they had to act: buy more or sell.
They have found this process of self-reflection so fruitful that they are now beginning to analyze how and when their investment decisions affect results.
For example, they noticed that they tend to trade on Fridays and are now looking into whether that time of week is when they perform best.
Of course, most individual investors can’t afford to hire a behavioral finance advisor, but journaling and reflecting on your own mistakes is free and can prevent you from repeating them.
Humility and learning to pivot is another good option.
Chris Davies, co-manager of the Baillie Gifford European Growth Trust, admitted to me last month that he had made mistakes in 2021, but is determined to rethink his strategy to avoid making them again. He said: “We weren’t using some of the tools that we had at our disposal that we could have used to help us ask a simple question: what’s behind share prices today?”
“This is about trying to correct an imbalance in the process. It has forced us to analyze the parts of our process that needed adjustments.”
A third option is to try to learn from history.
If you ever get the chance, I highly recommend a visit to the Library of Errors in Edinburgh, or any of their establishments around the world.
It’s a free-to-use library dedicated to the study of financial history, so that both professional and individual investors can avoid repeating the mistakes of the past. The challenges facing investors today may seem like uncharted territory, such as the rise of AI or skyrocketing government debt. But a visit to the library is a reminder that we’ve seen it all before, albeit in different forms.
A fourth option – also used by Mick Dillon – is to force yourself to think over a five-year time horizon. It is easy to get carried away by the problem blocking your way, but what really matters is the long term.
This approach allowed Mick to buy companies like aircraft manufacturers during the pandemic, when flights were grounded, because he could envision a longer-term future where things would look positive again when others couldn’t see beyond the short-term obstacles to success.
Finally, if all these options seem like too much work, there are two simpler ones.
The first thing is to find managers you trust who have done all this analysis themselves so you don’t have to.
And the second is to simply buy it all in. Don’t bet on just one perspective, but on all the options, visible and invisible.
In practical terms, this would mean investing in a well-diversified portfolio of companies across all sectors and geographies. That way, you will be in the best possible position for what lies ahead and not be dependent on a single outcome.
And the other advantage is that it leaves you more time to do the things you really want to do, like, in my case, wave jumping in the sea off Norfolk.
- What do YOU do to protect yourself from investment blind spots? Tell me about it: rachel.rickard@mailonsunday.co.uk
Go ahead! Companies should follow our advice
Businesses and regulators would save a lot of time – and households a lot of money – if they simply paid attention to Wealth & Personal Finance and its sister section Money Mail in Wednesday’s Daily Mail.
In February last year, I said in Wealth that telecoms operator Ofcom must crack down on above-inflation price rises on mid-contract broadband and mobile phone bills. Ofcom took until last week to do so. I know regulators like long consultations, but it would have saved households millions of pounds if it had taken action when we asked.
Meanwhile, millions of households saw their bills rise by about 17 percent in April — increases we could have done without because they came in the midst of a cost-of-living crisis.
Then, in May this year, I wrote that Pret a Manger was preventing me and other customers from buying coffee and sandwiches with its dual pricing model.
Pret’s subscription model meant that customers had to put up with seeing two prices displayed for every item: the subscriber price, which seemed reasonable, and the outrageously low price that non-subscribers had to pay unless you handed over the equivalent of £360 a year to become a Pret Club member.
Judging by the flood of reader comments, I was clearly not the only one who found the dual pricing model hard to accept. Last Thursday, Pret announced it was abandoning it. Well, better late than never.
I’ll be interested to see how Pret fares when it refocuses on satisfying its casual customers like me, rather than focusing on its most loyal customers. I understand that under the exit model, subscribers were transacting with Pret 28 times a month, compared with an average of twice a month for other customers.
In the meantime, I’ll celebrate both results with a delicious cheese sandwich.
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