Winners & Losers

March 2010

Sir Peter Blake wore red socks every time he sailed on the Team New Zealand boat when they contested for the America’s Cup in 1995, consistently returning to shore victorious.

One fateful day severe tendonitis in Sir Peter’s elbow prevented him from sailing and it was the only time in the entire 1995 series that Team New Zealand sailed without Sir Peter and his lucky red socks and the only time the boat was beaten on the water.

Superstitions, such as the absent red socks causing the defeat are common in sport and are also seen in the investment market – like never trading in January or always following the advice of particular newspaper columnists.

When they do well, these investors attribute their successes to their own skills and decision-making, but when their portfolios suffer they tend to blame unknown or external factors beyond their control.

Economists describe this behaviour as "self-attribution bias" - claiming the credit for good things and disowning the bad.

Other common behavioural biases include:

• Over confidence - a tendency to believe we are better investors than everyone else
• Hindsight - seeing the peaks and troughs as obvious (after the fact)
• Familiarity - investing in only what we know
• Regret - becoming overly conservative after a bad investment experience
• Extrapolation - assuming the market will continue in its recent pattern

Many of these biases, while helpful in some areas of life, can be destructive if we act upon them as investors and find ourselves failing to reap the benefit of good markets, or, in down markets, making a bad situation worse.

We can’t help behavioural biases, but we can limit their influence on our investment decisions by paying attention to those things within our control - like diversification and discipline.

Markets are uncertain, they go up and down, but they are extremely efficient in pricing in news, certainly more efficient than even the smartest individual without inside information.

If we can let go of our ego-driven impulses toward the market, we can minimise the damage that our behaviour can wreak on our portfolios and reap the returns from disciplined long-term investment – without needing a pair of lucky red socks.