Larry Berman's take on how personality affects investments
My Fall 2017 Investor’s Guide to Thriving tour features “What’s Your Investor Personality?” – a fascinating talk about the behavioural science of successful (and not so successful) investing. I will lead the audience through an exercise to identify what type of investor they are of the four key personality profiles of investors. I’ll examine the strengths and weakness of each profile, and show you how to use ETFs to build a more successful investment strategy for your personality type.
Today, I want to look at the growth investor, or accumulator. It is the most aggressive of the investor types. These investors tend to be entrepreneurial and are often the first generation to create family wealth. They are strong-willed and confident that they can control the outcome of markets, as they have enjoyed success in their business lives. We do not have control over the public markets like we do over our own businesses. This tendency, typically leads to a biases of over confidence and illusion of control. These biases can be detrimental to your portfolios as this type of investor tends to think they are smarter than the markets. Accumulators often trade too much, which can be a drag on investment performance. Accumulators are quick decision makers and often chase higher investment returns. They are often driven by the emotion of a winning investment. They typically do not follow prudent investment principals like diversification and asset allocation. They probably watch BNN or other financial media to get hot tip on a stock and enjoy talking about their winnings with friends and colleagues. If this scenario describes you, there are things you can do to improve your outcomes.
I’m an avid golfer. And the best golf teachers do not try to make you into something your body type is not suited for. With investing, I’ve learned over the years that it’s best to figure our what kind of investor type you are and navigate within your best skill set.
All investors have some degree of behavioural biases. For me, I have a tough time with momentum (or growth) type investing. Buying high (breakouts) and trend following does not suit my eye well, as golfer professionals like to say. It’s like trying to hit a high left to right draw on a sharp dog leg left hole with bunkers and out of bounds along the right side of the fairway and tall trees on the left. It’s possible, but not probable. I’m a much better value investor than I am a momentum (or growth) investor. I have a difficult time with stocks like Amazon (AMZN.TO) that have no real good way to determine value. For me, that subjects owning it to much higher volatility of returns than I’m comfortable with in my portfolios.
Over the past two decades, AMZN was one of the best stocks to own. It has an annualized return of 37.45 per cent compared to the S&P 500 at 7.45 per cent and the consumer cyclical sector at 9.55 per cent. Were it not for AMZN, the consumer cyclical sector would have underperformed the S&P 500. AMZN currently represents about 15 per cent of the index.
Over the past 20 years, there were nine major declines of 25 per cent or more. The biggest was from 2000-02 when the tech bubble burst. AMZN fell over 94 per cent. There were three other declines of about 50 per cent or more. The average was about 50 per cent. There is no one, and I don’t care who you are, that will stick with a stock that basically earns no money, through those ups and downs. This is the extreme case of a growth stock.
Deciding which stocks (or ETFs) are appropriate for your portfolio should start with at least a basic understanding of what the ride might look like. If you are a growth investor, then AMZN is likely to be in your portfolio. You need to know that every year or two you are likely going to see the stock drop 25-50 per cent and if you hope to harvest the longer-term growth, than you need to be able to handle the ride (volatility). One of these days, though there is no evidence of this yet, AMZN will start to trade like a mature company and not a growth company, in which case the earnings multiple will become an important metric. Today that P/E is about 250x earnings. I have no problem recommending a great company like AMZN, but you have to know if the stock will suit your (investment) eye. Knowing this will help you figure our what to own in your portfolio and avoid the emotional and cognitive biases that hurt long-term investment returns.
Come out to see my Fall 2017 Investor’s Guide to Thriving educational talks. The events are free and we ask for a voluntary charitable donation to either Sick Kids Hospital or Baycrest Brain Health research for Alzheimer’s. Visit www.etfcm.com or Bermanscall.com to register.
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