Investment mistakes identify real skill

Poorly performing investments by fund managers can be more revealing than their successes when assessing investment skill, according to an article in Towers Watson’s annual Global Investment Matters publication.

The report also explores the characteristics and traits shared by the world’s best investors including the ability to learn from mistakes. Towers Watson suggests this is also indicates truly successful investors. In the publication, it lists other important investment attributes such as a passion for investing; great self-belief, balanced with cynicism and self-doubt; a fierce intellect, a competitive nature; and a clear investment philosophy.

Craig Baker, global head of investment research at Towers Watson, said: “Getting inside the minds and hearts of managers requires understanding of the investment drivers and key issues for reaching investment decisions on selected investments. This requires detailed examination of the investments within the portfolio for any obvious inconsistencies with the process or investments that appear to contradict the process. It is important to recognise that mistakes are an inevitable consequence of taking risk where uncertainty exists and the identification of these mistakes in a portfolio, in the context of broader understanding of an investment manager, can be very helpful in determining the presence of genuine skill.”

Towers Watson says that to form a view of the investment skill a comprehensive understanding of the investment philosophy, process and the execution of the process must exist. The company suggests this is particularly complicated as differences of approach mean that the analytical framework applied to each manager and product must be flexible.

Baker said: “History shows that luminaries such as Warren Buffett and Peter Lynch have very different investment strategies. However, they are united in their disciplined, patient and unemotional approach to investing. Emotions such as fear and greed make it impossible to navigate an ever-changing market environment and build long-term wealth. They prompt investors to behave irrationally and chase the popular manager or asset class, abandoning their long-term investment plans. Successful investors understand that crises and uncertainty will inevitably rock the markets. However, instead of making drastic changes to their investment plans they keep a cool head and better position themselves to benefit from long-term growth.”

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