Personal dynamics: One of the essential ingredients of successful investing

Mark Seymour of Alphen Asset Management writes that he believes there are certain personal dynamics which make the difference between poor and successful investment returns.

It’s unfortunate that most clients don’t enjoy the returns achieved by the average investment manager. The reason for this is because clients often switch out of an investment when short-term returns are poor and switch into an investment which is doing well over the same period, locking in their losses. Secondly, some of the most skilled managers working as a team fail to deliver successful investment returns because of the different philosophies they hold as individuals. The reason for these discrepancies is because of the dynamics that exist between the client and the investment manager and between investment managers themselves. Let’s look at some of these unfortunate dynamics.

Luck or skill

Clients generally believe they are invested with skilful managers; however, the managers’ luck or skill is a derivative of their investment process. In the instance where short-term outperformance is generated by a manager who doesn’t follow a definable and logical investment process, the manager can be regarded as lucky. If on the other hand the manager has acquired skills through learning and training and implements these in a definable and logical investment strategy, the manager is regarded as being skilful. Unfortunately relative returns over the short-term often influence the client’s perception of whether the manager is lucky or skilful, resulting in inopportune switching of investments.

Investment philosophy and process

The investment manager is guided by a personal philosophy or set of principles which he/she believes will result in successful investment returns. Secondly, the successful investment process is constructed in accordance with the underlying investment philosophy. In many cases where the philosophies of the different team members are not in alignment, the governing investment process is compromised which leads to dissonance between investment managers and erratic investment returns. Investment companies that have shown to be successful, either follows a model which relies on a strong team ethic or a model which fosters the strengths of individuals and backs the person up with the necessary research and resources.

In summary

To enjoy successful investment returns you need to entrust the management of your capital with a skilful investor. In this regard, you need to be openly honest and logical about how you assess the manager’s skill. Once you have recognised a manager with skill, you need to ensure that he/she is part of a team who share the same investment philosophy and follow the same logical investment process. If the skilful investor you have chosen works as an individual, you need to ensure that he/she has the necessary resources and systems in place to help facilitate the successful implementation of the investment process.

The Alphen Angle is an electronic publication of PSG Alphen Asset Management Alphen Asset Management an authorised Financial services provider. If you have any queries regarding the above commentary please contact Mark Cliff on 021 799 8069 or 083 700 3600.