If you have ever run a business, or responded to an RFP (Request for Proposal), one or both of two feelings is always felt by those competitive leaders involved, albeit the sentiments are in competition to each other. The first is; (a) “Did we win the bid?” The second question, presuming the first is affirmative, is; “How much money did we leave on the table?”
If you’ve ever been in the above circumstances, we sense that even now memories of those questions are recalled to mind. However, let us use this analogy to speak of investments as well, as there are startling similarities.
One of the wisest and most respected syndicated financial writers is a guy by the name of Jason Zweig. In a just released Wall Street Journal article (“How Investors Leave Billions on the Table”, Wall Street Journal, Nov, 2-3, 2013) he observes;
- The giant bond fund, Pimco Total Return, run by the renowned Bill Gross just reported a year ended September 30, 2013 loss on his fund of 0.74%. This number is actually a respectable level in light of the benchmark Barclays US Aggregate loss of 1.89%. However, investors in the fund incurred losses of 1.4%, nearly double what the fund did. Why? Because they yanked out $7.3 Billion in May and June 2013, right before the fund rebounded.
- If you think that is bad…Morningstar tracked the performance of 47 funds that had more than $1 Billion invested in them. For the 12 month period ended September 30, 2013, “investors on average under-performed those funds by at least three percentage points”. Why? Because even the most nascent investor knows that buying high and selling low runs into a basic third grade math problem.
As investors, we have been miserably served by the academics to confuse the word ‘risk’ with ‘uncertainty’. Risk feels unbounded, whereas uncertainty leaves us with no foreboding sense of doom, but simply of the fact we don’t exactly know what is to happen next. NOTE; not eventually, but next. Astute investors know that in the equity markets we don’t know is what is immediately next, and the market goes up and down (both absolutely true). That is uncertainty, and it unnerves us enough to make foolish short term decisions confusing ‘time in the market’ with ‘timing the market’. But keep this irrefutable fact in mind; it is the uncertainty of equities’ return—its “volatility” above and below a relentlessly rising trend-line of long-term value—which is the direct cause of the return premium of equities over bonds.
In this sense, as investors, you actually WANT volatility. It is this single mathematical and rational outcome that drives equity returns to provide the greater oomph in your portfolios. You frankly would not want less, or As Mr. Spock always says to Captain Kirk: “It isn’t logical, Captain.” Acting to avoid such volatility by not controlling your emotions, you leave money on the table, a reality that has been witnessed for over 60 years of measurement. Alternatively, and added just to be fair, you would not want more uncertainty or risk in your life (or portfolios) then than you need unless you are a masochist.
Please learn from the above, and take comfort in the uncertainty of markets. That mindset is not only profitable; it will allow you to be calm when others are in turmoil.