Adding value a fraction of the time
We’ve all heard at least one average Joe say they’ve been screwed by the market because it’s rigged against the little guy. While we can sympathize, we believe this is categorically untrue. The market isn’t the problem, investors’ often untameable emotions are.
Humans just aren’t built to manage risk well. As former cave dwellers, our survival used to mean focusing on immediate dangers, like starving to death or being eaten by a woolly mammoth.
Although the woolly mammoth is now extinct and we’re a long way from our pelt-wearing predecessors, when it comes to managing money investors have been slow to adapt to their relatively safe lives. They continue to succumb to their urge to fret about the here and now, which they perceive as volatility and other market noise that they often treat as risky and worthy of swift action.
Let’s face it – while periods of drama in the market may loom large, they’re by no means an everyday occurrence. For the most part things plod along under pretty benign financial conditions. The market is gentle on investors the vast majority of the time and there’s really nothing all that special to how you need to behave with your investments to be okay.
It’s during that remaining small fraction of the time – in extraordinary circumstances – that what you do truly counts. Your fate in the market is actually determined by your actions in the “tails” when stocks are either extremely overvalued or undervalued. And history proves that when the stakes are the highest, most investors simply can’t think rationally.
This is when investment managers like us can offer the most value. We live in a narrow emotional band so that you don’t have to. While the Chicken Littles of the world are claiming the sky is falling, which will happen a minimum amount of the time you’re invested but could have a significant impact, it’s our job to stay grounded and focused on the right variables to see you through the turmoil.
Over the years we’ve written about the risks associated with letting emotion impact financial decisions, including these commentaries where we delve into the pitfalls of thinking with your heart instead of your head.
2009 year-end review
The irresistible pull of fear
We won’t deal in drama
The value of sound advice
EdgePoint in action
Investors enlist our help to do what they can’t – go against the crowd and capitalize on market anomalies rather than shy away from them. Historically, it’s during the times of greatest uncertainty that we’ve behaved meaningfully differently from the market and built meaningful wealth as a result.
Each of the four periods highlighted below were prefaced by significant market drops, when fear and confusion dominated investors’ mindset. We saw what others didn’t, took advantage of volatility and came out ahead.
Annualized returns as at April 30, 2015 for EdgePoint Global Portfolio, Series A: YTD: 10.16%; 1-year: 25.16%; 3-year: 23.87%; 5-year: 15.61%; since inception: 19.33%.