Psychological investing

In many ways, you can test the mettle of an investor by seeing if they put their money where their mouth is. Dr Mark Mobius, legendary investor and president of Templeton Emerging Markets Group, recently proved his ability to do so when my business partner, Paul Gambles, I interviewed him on stage at the Foreign Correspondents’ Club of Thailand.

“We should have been open here months ago,” Dr Mobius said, referring to Templeton establishing an office in Thailand for the first time. “But our office was burnt down during the riots.”

But did those tumultuous events in May dent his confidence in Thailand as an investment market? “Not one bit.”

While many an investor or fund manager likes to present a front of being tough, uncompromising and bullish, Dr Mobius’ comments were not born from brash bravado, but were the product of his more than 40 years of investing in emerging markets. He set up the world’s first emerging markets fund, the Templeton Emerging Markets Fund, in 1987 and was active in Thailand before the SET had been established and the Bangkok Stock Exchange was little more than a chalk board in a private office.

Knowledge, experience and time are probably the three most important skills or resources that are needed to successfully manage an investment. But most people lack one or more of these due to the demands of everyday life. After all, they have jobs to do, families to care for and face other demands which prevent them from having the time to look after their own investments properly. That is why statistics show that allowing a professional fund manager to take care of your investments is more effective than trying to do the job yourself, with the caveat of doing your homework first and selecting a competent professional with a good track record.

However, the biggest obstacle to making personal investments which yield solid returns, even when using a fund manager or financial planner, according to Dr Mobius, is the psychology of the non-expert investor.

Bull markets typically last longer than bear markets, but most individual investors decide to sell when their stocks have already suffered a crippling collapse and are sluggish to re-invest, only bringing themselves to do so when the ability to make a profit has been severely eroded.

Such problems exist even when a close relative is a leading fund manager. “I was on a trip back to New York and I went round to see my brother and his wife,’’ said Mobius. “I knocked on the door, from behind it my sister in law asked ‘Who’s there?’ She’d bought into my emerging markets fund in 1993 but had seen her investments suffer in the crash of 1994. Anyway, I said ‘It’s Mark.’”

“I’m not opening the door until you tell me how to get my money back.”

“I told her, ‘If you open the door, I’ll tell you how to get your money back.’”

“She put the chain on and opened the door. I said, ‘Buy more.’ She slammed the door in my face.”

The point of the story is that often the best way to profit from investments is to act counter-intuitively, but most individual investors lack the knowledge or the nerve to do so. Which is why, more often than not, it is better to leave the job to the experts.

Mobius has some other simple guidelines for making sounder investments: never borrow to invest. It is always better to be patient and save until you have enough capital to make a play, and to remember that “no market is safe”. But while these suggestions are based on more conventional wisdom they are too often ignored by both professional and layman alike.

Emerging markets may offer the best potential for growth. Often, at times, more than double that of developed markets, but they are also vulnerable to their own crashes and business cycles. Greece, for one, has gone through the cycle of moving from being an emerging market to a developed one, when it joined the EU, only slipping back into emerging status when the sovereign debt crisis took the country in its grip earlier this year.

Frontier markets, such as Kazakhstan and Nigeria, which may seem like a horrendous risk, offer significant first-mover potential for investors who are able to conduct fertile and proprietary research in what are essentially virgin markets.

While derivatives - the darling of the ‘noughties’ investment world - are currently valued at US$600 trillion, almost ten times more than global GDP, maintain the ability to unleash new tidal waves of volatility.

We also now live in a world where the possibility of an emerging economy, China, overtaking the world’s largest economy, the US, is a distinct reality.

Unless, in this era of Black Swans, financial shockwaves and shifting economic power, you have the time to monitor your investments on an hour-by-hour basis, have the nerve to lead the crowd, buck trends and buy when all else are selling, perhaps its better to find a professional who does. To make sure you are extremely confident of your money being looked after well then also make sure you go with a multi-asset, multi-manager alpha fund with high liquidity.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]