Invesco Canada blog

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Rob Mikalachki | July 17, 2012

Cultivating self-awareness

I firmly believe that one of the most important things an investor can do is cultivate self-awareness.

Investors big and small have a very rich history of getting in their own way. If everybody could just pause, take a breath and reflect on their history of investing, I think they’d be able to identify where they’ve made mistakes along the way.

Becoming aware of your biases is the biggest step in overcoming them.

Average investors, whether they own units in a mutual fund or stock certificates, are transient owners of a piece of paper. They spend a lot of time looking at what that paper is worth on a day-to-day basis. This leads many investors to get sucked into the day’s news headlines and how they affect the short-term value of investments.

The problem with this is that making decisions based on what has just happened is backward-looking. For example, despite all the warnings of a heated real estate market in the United States, how many investors fled bank stocks before the carnage? How many investors distrust and eschew bank stocks today despite their trading at some of the most inexpensive valuations in a long time?

Unfortunately, many investors might find their biggest foe in the mirror. The chart below shows 20-year annualized returns by asset class (from 1991-2010). It’s tough to keep emotion out of decision-making.

So, rather than obsessing over headlines, we focus on determining what’s special about a specific business. What will allow it to outperform its peers over the next decade? How fragile or impregnable is that competitive “moat”? Who is minding the store? We see that piece of paper as representing our ownership stake in a business.

As a result, we tend to spend very little time forecasting the fortunes of a business over the next six or 12 months. When people ask me the usual “annual outlook” type questions, I tend to respond by looking the other way. In my mind, to think that you have some kind of financial clairvoyance is dangerous.

We’re often most excited when market pessimism is at its highest, and most concerned when the market is overly exuberant. We’re the ones carrying umbrellas around on those cloudless summer days.

12 awards in 10 years.

The Trimark Small-Cap Equities team does it again!



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5 responses to “Cultivating self-awareness

  1. Hi Ron, thanks for the question. Because we are bottom-up investors it is easy for a client to see our views, by how the portfolio is structured. Cash levels within the funds is usually a good barometer for a client to gauge whether we are excited or fearful. In the case of Trimark U.S. Small Companies Class the high cash level is a little skewed because the Fund had a number of companies acquired over the last year. While we have been able to reduce the cash from approximately 30% at the beginning of the year to approximately 22% (as at Sept 30, 2012), the high cash level indicates we are still having trouble identifying compelling investment opportunities. Keeping with the theme of transparency, a look at our top 10 holdings will provide insight into the companies we are most excited about. Because we run concentrated portfolios, the businesses we have the highest conviction in will have the largest weights.

  2. I totally agree with your direction and attitude. Today, are you excited or fearful to invest money in US companies? and which ones?

  3. Thanks for the comment Gordie. Avoiding the 24-hour news vortex is tough these days, but as a team, we do our best to stay focused on the long-term growth prospects of the businesses instead of making predictions about the next few months.

  4. Speaking of clairvoyance…I have a crystal ball in my office propped up by the three monkeys i) hear no evil ii) speak no evil iii) see no evil. Rob, you hit the nail on the head. Just keep on doing what you are doing! Your team rocks!!!

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