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Investment Strategy
Sunday, April 1, 2007
Guard your wicket

In the relative pedestrian pace of cricket tests there is much time for contemplation, if only to offset moments of possible boredom. Nic Andrew, head of Nedgroup Investments, has evidently been struck by how many similarities there are between investing and test cricket.

“Winning test cricket matches is often about not making mistakes at crucial times,” he says, “whether it be a reckless stroke or a dropped catch. Similarly, recognising how to avoid the common mishaps is often the most vital aspect of a successful investment strategy too.”

The more common mistakes

No strategy. Each team needs a clear strategy on how it will approach a match. The Australians are masters of this as they target key opposition players, applying enormous pressure at crucial times. Every investor should develop a strategy that acts as a framework for decision-making. This should take into account factors such as one’s investment objectives, time horizon, ability and willingness to accept risk, the level of one’s investable assets, planned future contributions and tax status.
Not effectively implementing strategy. One of the most frustrating things for a captain is when a clear strategy is set (such as bowling in the channel outside off-stump) and the bowler does not stick to it and strays down leg. An investment strategy is useless if not implemented with discipline and reviewed regularly to ensure it remains relevant.
Lack of patience. South Africa’s talented openers seem to lack patience and foolishly lose their wickets flashing outside off-stump in the early overs. Many investors set an investment strategy then lose patience and change tack at exactly the wrong moment as soon as things do not go as planned. Investing is like test cricket, as opposed to speculating which is more aligned to the twenty-twenty format. It requires patience.
Unrealistic expectations. Despite all the Barmy Army chanting and tabloid predictions, Australia was always too good for England. It is imperative that investors reasonably anchor their expectations. Particularly after strong market performance, investors get greedy and want to get rich quickly. Over the long-term investing in risky assets (such as equity) should outperform inflation by about 7% per annum. Long-term expectations above this are unrealistic and likely to remain unfulfilled.
Not understanding your true tolerance for risk. Everyone loves Gibb’s attacking style of hitting over the top, until he holes out in the deep. Many investors are unable to predict accurately their appetite for risk. Understanding how one will react emotionally to large short-term fluctuations and capital loss should be done upfront to avoid inappropriate knee-jerk reactions at times of stress.
Overconfidence. The South Africans were humbled in the first test after thumping the Indians in the one-day series. Human beings are often too confident in their own ability. This leads to certain destructive behaviour, such as trading too frequently or being overconfident in one’s ability to predict uncertain events. Confidence tends to increase dramatically after a period of good fortune.
Paying too much in expenses. At the end of the series, every run counts, whether it is a McGrath snick through the slips or a classic Ponting cover-drive. When investing, every percentage of returns counts. An element of this is ensuring one does not pay too much in fees and expenses, and being sure to measure results net of fees and taxes.
Lack of diversification. In any test line-up, diversification of skills is important to winning. For ages, the South African team has lacked a quality spinner who can wrap up an innings. The antidote to risk is to invest in a broadly diversified portfolio incorporating different asset classes and investment styles.
Chasing performance. It is natural to wish for continual excellence in performance. Unfortunately, even the best players have slumps and it is best to stick with class players as they will often play their way out of it.
Investors who chase performance invariably end up buying high and selling low – a sure recipe for disaster. The classic buy-high/sell-low investor profile is someone who has a long-term investment strategy but does not have the tenacity to stick with it or those who follow fads or the latest ‘hot tips’.
 

Copyright © Insurance Times and Investments® Vol:20.3 1st April, 2007
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