Throughout the COVID-19 crisis, we have been told to trust in the scientists’ data that underpins the decisions being made by governments around the world. But can the same approach be applied to investing? Rebecca Cretney and Simon Prescott answered our questions as to why they believe there is a parallel between scientists’ approach to patient care and how investors build portfolios.
Simon: It began due to a Forbes article I read about a book called the One Page Financial Plan, by a US-based adviser called Carl Richards. In it, he details that he was discussing investments with a friend and medical practitioner who stated: “If I practiced medicine the way I invest, I would have killed half my patients.” It’s a quote Richards liked a lot and now many more do too – including me.
Essentially, the analogy sets out that, as a scientist, Richards’ friend would study peer-reviewed studies to gain confidence that he was making the right choice about a patient’s treatment, ahead of prescribing anything. The same physician, however, flagged that he failed to follow that logic when investing. Instead, he’d still seek out recommendations from friends, read the newspapers and make a decision based on a ‘gut feeling’ as to whether to buy or sell. His approach to investing didn’t involve doing any research, despite his professional reliance on it. You could argue his approach to investing was the medical equivalent of self-medicating after a couple of minutes on a search engine to determine the cause of an ailment.
Rebecca: And this chimed with me due to a recent article I had read in the Financial Times (FT) that argued that “most” portfolio profits result from the outperformance of “a tiny number of superstar companies” that should never be sold – advice which was predicated on a series of examples that highlighted the additional gains investors would have made if they had followed the ‘sage’ advice of not selling holdings too soon. The argument had been based on a research paper that had been published (and republished with updated data), but which was subsequently condemned by peers, not least as the paper had admitted – albeit only in a footnote – that its theory was flawed if your investment portfolio was well diversified.
Rebecca: With some much information available, it’s easy to find a piece of research that confirms your point of view. Called confirmation bias, it sets out that investors pay attention to the evidence that proves their point to the extent that they ignore any research that doesn’t validate their theory. In the case of the FT article, readers were drawn to the simple conclusion that “the upside of not selling is nearly unlimited” and were provided with reasons to believe. However, a more experienced investor will be able to cite lots of examples where that hasn’t happened. Ask anyone that invested in stocks such as Blackberry, Eastman Kodak, or any of the oil companies, and ignored the research providing the reasons to sell. And you only have to look at the leading stocks in today’s FTSE 100 or S&P 500 versus 20 years ago to see this is often the case.
There will, in truth, always be examples of investments that were sold, typically to realise (substantial) profits, but that continued to climb higher and post further gains over the following months, or sometimes even years. The only way of knowing though which stocks you shouldn’t have sold is through hindsight. As such, profit taking is always a sensible answer if you have seen some stellar returns and have concerns over the stock’s future.
Simon: This has been proven time and time again as the value of investments falls, as well as increases, given the economic cycle changes, existing technology is replaced by new advances and – just like anything else – some stock selections are based on fashion. In the last five years, for example, value investing has struggled with many turning their back on the approach, only to see value stocks outperform in the first three months of 2021 as the investment style become acceptable again.
Rebecca: Another approach to investing that research shows to be flawed is that stocks should be only held for a very short period before being flipped. While there is significant research explaining why, it’s probably easier to illustrate the point by citing Warren Buffet, who stated: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
This is because picking the low and high points of a stock’s value is notoriously difficult, as our colleague James explained in this article. Even if you were satisfied buying ’close’ to the bottom and/or selling ’almost’ at the top, it’s actually still difficult to earn a living over a short timeframe, let alone a longer one. This is because it would see you investing too much in too few stocks – and the benefits of diversification have been proven in research since 1952. It would also take you a considerable amount of time to pick more than a handful of stocks – even without any research. And a lot of any profit would be spent on trading fees.
Simon: Another piece of research we often highlight as flawed is that people should invest in stocks that are familiar to them, which, incidentally, often employs another of Warren Buffet’s famous quotes as part of its evidence. It argues that investors should stick to buying simple businesses that they understand. Again, examples are used, such as Nortel and Enron, to deter investors from seeking out the shares of companies with complex product lines. However, the issue here is that what is simple to an investor is often very familiar and this, in turn, typically leads to a home bias in his/her investment portfolio. Generally, people invest significantly more in their home market than its share of global market capitalisation justifies. And while there is the argument that this protects against currency risk, there are some very efficient tools that can be used to mitigate this risk. In addition, some currency diversification might be advisable if your income, property, business interests and other assets are already denominated in one local currency.
Simon: There isn’t one sole piece of research that underpins every single investment decision we, as a firm, make. Instead, it’s a combination of experience (based on real time knowledge of market movements), research from multiple third-party sources, as well as our own analysis. And, as a professional wealth manager, we have access to significant levels of all of these types of information to provide well balanced advice to all of our clients.
Rebecca: To close the loop, it’s worth highlighting that Richards’ scientist would quickly realise that doing research to underpin his investment decisions is never going to be a valuable use of his time. After all, many of the reasons he has access to the right medical research are due to his job. And the same is true of investing. So, perhaps, the only piece of research he really needed to do was to understand which professional wealth manager to select in order to tailor a portfolio designed to meet his goals and aspirations. After all, medical treatment is tailored to the patient as is investment advice to individuals. This would ensure that his investments stood the same chance of a successful outcome as his patients expected.
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Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 to speak to our client services team.
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The value of investments can fall, as well as rise, and you might not get back the original amount invested. Exchange rate changes affect the value of investments. Past performance is not necessarily a guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios and is referenced for illustrative purposes only, not as a recommendation, not least as it may not be suitable. You should always seek professional advice before making any investment decisions.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
+44 (0)1624 645813
Nedbank Private Wealth manages mainly multi-asset portfolios, so our communications don’t tend to focus exclusively on one asset class. However, today we propose discussing equities. Why? Because when you consider the news headlines, and then consider equity markets, we appear to be living in a parallel universe.
Read moreThe news feed from the coronavirus is all consuming, and rightly so. A disease that was widely touted, just a couple of months ago, as ‘similar’ to influenza has infected millions and killed hundreds of thousands of people.
Read moreTwo major disasters have crossed paths and it seems that the only good news we read about these days relates to how the coronavirus pandemic is slowing down climate change. Otherwise the press is full of heart-breaking stories of loss, peppered with acts of kindness and a sense of us trying to pull together. No one can tell us with absolute certainty what the future looks like, or when this will end. It can feel like we are staring into the deep unknown.
Read moreOne of the first lessons you are taught when studying anything investment related is the role diversification plays. For my investment exams, I was taught a diversified portfolio consisted of around 20 stocks ‒ a mere nod to today’s view. Instead, your portfolios – if you are a client of Nedbank Private Wealth that is – are invested across thousands of companies.
Read moreAs we witnessed in our latest webinar (click here for the Q&A), investors are struggling to understand everything given the tsunami of news. Markets have begun to claw back losses in some areas, but there may well be more bad news ahead, before we see a sustained trend in positive headlines. So what’s next?
Read more“He allowed himself to be swayed by his conviction that human beings are not born once and for all on the day their mothers give birth to them, but that life obliges them over and over again to give birth to themselves.” ― Gabriel García Márquez, Love in the Time of Cholera
Read moreAs children, most of us were excited to visit a sweet shop – I definitely was. Dazzled by the bright display of shelf upon shelf of glass jars, there were sweets of every possible shape, colour and taste – all covered in sugar. Some coins lay in my hand, but which sweets would I choose?
Read moreToo often we believe clients sit in too much cash. We understand why people do this, but we think that too much can be an issue. How much do you really need?
Read moreWe are one of only a handful of wealth managers who use currency management as part of our investment approach. In this short 45-second video, we explain why.
Read moreInternational Women’s Day was on Sunday 8 March, a day that since 1910 has focused attention on women’s rights. The day – and the invitation to speak on the topic at the Institute of Directors on 6 March – prompted me to think through how much has changed for women in the last 110 years. While there are still challenges ahead, this is pivotal time for women.
Read moreAllie Kirk, private banker, speaks to Rebecca Cretney, one of our investment specialists, about the current market turbulence.
Read more
Simon heads up the wealth planning division for the international business. He works with clients and their families, in tandem with their professional advisers, to help structure their investments and other financial assets to achieve their goals and aspirations through the development of bespoke wealth plans. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.
Simon has over 24 years’ experience of delivering investment and planning advice, 15 of which have been with Nedbank Private Wealth. His appointment followed the establishment of bank’s wealth planning function, where he was instrumental in its design, build and implementation.
Simon holds the Level 7 Diploma in Advanced Financial Planning, the highest financial planning qualification in the UK, and is a Certified Financial PlannerTM, a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.
Simon heads up the wealth planning division for the international business. He works with clients and their families, in tandem with their professional advisers, to help structure their investments and other financial assets to achieve their goals and aspirations through the development of bespoke wealth plans. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.
Simon has over 24 years’ experience of delivering investment and planning advice, 15 of which have been with Nedbank Private Wealth. His appointment followed the establishment of bank’s wealth planning function, where he was instrumental in its design, build and implementation.
Simon holds the Level 7 Diploma in Advanced Financial Planning, the highest financial planning qualification in the UK, and is a Certified Financial PlannerTM, a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.
+44 (0)7551 124140
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