“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Mark Twain
I have given up on Fantasy Football. I was always forgetting to sort my team until the last minute on a Saturday, and it was all a bit of a hassle.
But if I’m really honest with myself, I was rubbish. And I found this to be deeply frustrating.
For context, I watch a decent amount of football. Probably more than Mrs H would like anyway. I read about the game regularly and, not to brag, once got Crewe to the Premier League on Football Manager. So I reckon that I know a bit more than the average bear, which made the kicking that I received in the work Fantasy Football league every year that much more difficult to take.
What I have exhibited here, dear reader, is overconfidence. My behaviour is a classic example of the Dunning–Kruger effect – a tendency for individuals with a low, or average, competence in a particular field to over-estimate their abilities.
I can think of a number of callings where this bias could be particularly dangerous – I wouldn’t fancy having an overconfident pilot. But this bias is a clear and present danger to investors too.
There has never been more information out there for investors. The “secrets” to investing (spoiler – there are no secrets) are no longer hidden in ivory towers guarded by red-faced fellows wearing braces.
The principles of good investing are easily accessible to everyone, and only likely to get more so. On balance, I am of the view that this is a good thing.
But distilling all of the available knowledge that is out there into an investment strategy that is suitable for you, and your family’s future, is not straightforward.
A little knowledge can be a good base for your journey, but if it leads to over confidence well then you have a recipe for disaster.
The clients who I have worked with over the years who have gotten the best outcomes have all sat at the extreme left or extreme right of this chart.
The ones tucked up against the left hand side largely ignore their portfolio, and listen to the advice of the professional who has a regulatory responsibility to act in their best interests. If I get a personal trainer, and listen to their advice slavishly, I will get in shape – it is really that simple.
The ones on the right side, the properly experienced investors, have seen enough to know that there is no secret.
The difference between a successful investor, and an unsuccessful investor is down to execution – not information. There is no secret to this stuff, you don’t get access to any silver bullets when you reach a certain level of wealth. The best do the basics the best.
Having a little knowledge can lead to feeling like you need to tinker. “There is a recession coming, I should trim my stock exposure”. “AI is the future, I should be loading up on Nvidia”. “Cash rates are fantastic, I can’t be bothered with stocks, I’m getting 5% risk free”.
But tinkering is a dangerous pastime. And the reason that tinkering is a dangerous pastime is because completely counter-intuitive things happen in the market all of the time. It only takes one bad decision to get caught offside.
For one of countless examples, just look at the performance of the index linked gilt market in 2022. During a period of the highest inflation that the country has seen in a generation, one might reasonably have expected index linked gilts* to have done quite well.
WRONG.
Source: London Stock Exchange. Past performance is no indicator of future returns.
As an investor, you can be right about something (the path of inflation), but wrong about the market reaction. Not only completely infuriating, but also potentially destructive to your wealth.
Predicting how markets are going to behave is just incredibly, incredibly difficult. Some of the smartest people on planet earth try and fail. A copy of the Sunday Times finance section isn’t much of an edge.
Investing nirvana comes when we learn to accept the occasional chaos of capital markets, and only spend time focussing on what we can control. And by happy coincidence, the things that we can control (primarily, our own behaviour) have a far bigger impact on our eventual outcome than any tinkering with our investment strategy can ever have.
Speaking of what’s actually important, I’m clocking off for Christmas. Happy holidays.
*What are index linked gilts? They are a type of government bond. You, the investor, lend money to the government in exchange for the repayment of your loan on a specified date in the future, along with interest payments along the way.
With standard gilts, this interest is set at a fixed rate e.g. 5%. With index linked gilts, the interest payments and the final repayment amount adjust in line with the Retail Price Index (RPI - a common measure of inflation in the UK). So index-linked gilts, or “linkers” as they are colloquially known, can be thought of as a “hedge” or a way of protecting against inflation.
For an explanation of why they got so hammered in 2022 - well that’s a story for another day.
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