Ninety One’s Four Investment Tips | Hywel George on Buffet

Ninety One’s Four Investment Tips | Hywel George on Buffet

Author

Jurie de Kock
May 03, 2024

Behavioural Finance

Conventional finance theory is based on investors who are supposed to be rational and wealth maximisers. Thus, they always tend to make rational financial decisions, which is the central motto of modern portfolio theory (Markowitz,1952).

However, this theory has proven flawed in practice in terms of investment behaviour, which has led to the study of the depth of behavioural finance in developing economies (Sharma & Sharma, 2022).

Numerous empirical evidence in different financial markets justified the fact that investment decisions are not consistently based on the crux of contemporary financial theories. As a result, studies of behavioural finance became more crucial in the stock investment decision-making process (Ackert, 2014).

Behavioural finance is profound by different scholars who elaborate on investors' behaviour, while standard finance fails to explain sufficiently (Sharma & Sharma, 2022).

Given this background, Ninety One recently shared four tips for South African investors. In contrast, Hywel George, as Old Mutual Investment Group’s (OMIG) Director of Investments, analyses what made Warren Buffett successful.  

I also include a read I enjoyed on 9 Habits of Wealthy Individuals who Remain Humble and Grounded.

Ninety One’s Four Tips for South African Investors

NinetyOne sales manager Paul Hutchinson gives four tips for investors to make better decisions and stop self-destructive behaviours.

DALBAR, a financial services market research firm, has provided evidence of the self-destructive investor behaviour Hutchinson referred to.

DALBAR recently released the results of their 30th annual Quantitative Analysis of Investor Behaviour (QAIB) study to the end of 2023. 

This study measures the effects of investor decisions to buy, sell and switch into and out of mutual funds (unit trusts) over short- and long-term time frames.

“Unfortunately, the results of the QAIB study do not change. Due to their behaviour, investors earn less – in many cases, much less – than mutual fund performance reports suggest,” Hutchinson said.

In 2023 the US equity market was up 26.3%, whereas the average equity investor realised only 20.8%. This means that their behaviour cost them a significant 5.5%.

This was also the third-largest average investor gap in the last ten years. 

“Interestingly, the two largest average investor gaps both occurred in strongly positive equity markets – on average, investors are therefore not benefiting from the full equity market upside,” he said. 

“Over longer periods, the average investor gap, while still significant, is lower, approximately 3.6% per annum over both 5 and 10 years. No doubt, South African investors behave the same way.”

Therefore, Hutchinson, the behavioural finance role played by financial advisors is critical, especially during periods of increased market volatility and uncertainty and during market corrections. 

He believes that financial advisors need to reinforce the following four key messages when counselling investors consistently –

1. Stay the course, stay invested

“The key message for investors is not to panic and interrupt their compounding period,” he said.

“Yes, a market correction is scary to live through, but the recovery is often swift. Anyone who sells out in panic may miss most of the gains when markets recover.”

Furthermore, he said investors often underestimate how long they will be invested. 

Even someone mid-way through their working career realistically has a 40-to-50-year remaining investment time horizon. 

“Unfortunately, underestimating your investment time horizon often results in you reacting too negatively when equity markets underperform in the short term,” he explained.

“However, with time comes a greater degree of certainty; while over shorter time frames, equity investors do run the risk of a negative return, as the investment time horizon lengthens, so the risk of a negative return is ameliorated.” 

He said it is noteworthy that the South African equity market has never had a negative 5-year return, a clear demonstration that time helps to lessen risk and improve investment outcomes.

2. Be aware of behavioural influences

Hutchinson said investors need to be aware of the negative impact of common behavioural influences – like loss aversion, mental accounting, anchoring, herd behaviour, and regret.

“Often, we are our own worst enemy. This can be particularly true regarding investment decision-making,” he said. 

“Traditional investment theory is founded on the belief that investors consider all relevant information before making rational investment decisions.” 

“However, in practice, this is often not the case, given that investors are negatively influenced by any number of behavioural biases.”

At times of increased market volatility and disappointing investment returns, the impact of these biases is more pronounced.

This makes investors feel compelled to act by selling their long-term growth investment, seeking the perceived safety of cash. 

“However, as difficult as it is to do nothing in market downturns, an analysis of previous market corrections shows that it may just be the best investment strategy,” he said.

3. Learn from the past

Hutchinson said it is important for investors to reflect on lessons from the past – that markets go up over time and that hiding in cash will not generate the necessary real returns to retire comfortably.

“With seemingly attractive interest rates on offer, South Africans are increasingly hoarding cash in retail bank accounts and money market unit trust funds,” he said. 

“However, the average retail investor’s holding period exceeds 12 months, which means they are not maximising the return potential of these conservative cash holdings by investing in more suitable growth-oriented investments.”

4. Invest early

Hutchinson said that to maximise the benefits of compounding, investors need to invest at the earliest possible opportunity.

“The timing of when, or even if, to invest in equities often seems fraught with danger — the markets are expensive, there is risk of recession, interest rates are high, countries are at war, and the like,” he said. 

“Unfortunately, there is always something to be concerned about, yet equity markets go up over time.”

He referred to studies of the US and South African equity markets that have confirmed that 75% of the time, it is better to invest a lump sum immediately rather than average in over 12 months.

“Interestingly, even investing at the worst time results in a better outcome than staying in cash,” he said.

Hywel George on What We Can Learn from Buffet

As Old Mutual Investment Group’s (OMIG) Director of Investments, Hywel George shares his analysis of how Buffett makes his money - and what we can learn from him in our investing.

This month’s webinar focuses on Warren Buffett, who, at 93 years old, is one of the oldest – and possibly greatest – investors of all time.

We can all learn something from his investing style. It is instructive to investigate how he did it and the unexpected tricks of the trade he used along the way. 

He first shares a market overview of offshore markets, including the latest update on the larger US Magnificent 7 shares and the highlights of the US economy showing various signs of strength, where some parts of the economy are doing very well, yet others are not. Before going into the featured section, he also looks into the geopolitical tensions around Russia and Ukraine and lightly looks at Crypto and the upcoming US Election, including why he thinks Trump will take top honours to become the next American opinion.      

To view, click on this YouTube link below:

In a further article related, the Financial Times looks at “Berkshire after Buffett: the risk ‘genius’ pulling the insurance strings” in what made Berkshire Hathaway successful and how this can be followed after Buffet.

9 Habits of Wealthy Individuals Who Remain Humble and Grounded

Enjoying the recent shorter weeks resulting from all the public holidays, I saw this article that I thought was a good read, looking at more than only money management;      

Friday Food For Thought