Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Getting outside the investing comfort zone

Jeremy Chunn  |  02 Aug 2022Text size  Decrease  Increase  |  
Email to Friend

Every investor whose portfolio includes directly selected stocks and various other traded securities will endure stretches of wondering if things are going adrift.

All the news says the market is doing well, so why am I going nowhere, or, worse, backwards? Too often investors will keep their doubts to themselves, leaving them to compound over years into losses that only tempt them into riskier strategies.

The biggest reason to talk to others is to challenge “confirmation bias”, the habit of paying attention only to news or views that agree with an investor’s beliefs.

“It’s easy to get caught up in our own bubble, only reading and listening to information that supports our own view,” says Ophir Asset Management co-founder and senior portfolio manager Andrew Mitchell. “This can be really dangerous.”

It takes courage to admit when you need help. Professional money managers know all about this, of course. There is nowhere to hide when their results are published and ranked among peers. In a sector known for its eclectic mix of egotists and eggheads, how do fund managers seek input from others?

One step is to diversify your investment news feed. Web browsers and social media apps are all set up to show information that is similar to other things the user has already looked at, Mitchell says, creating a feedback loop.

“You really need to be challenging your investment strategy and thesis behind each of your investments. If you throw rocks at them and they still stand up then they are more likely to be right and stand the test of time.”

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Mitchell suggests testing ideas with “intelligent people you respect who disagree with you”. They may benefit equally from a jousting session.

Healthy discussions sometimes include a little friction, or course, but First Sentier Investors co-head of multi-asset solutions Kej Somaia says that can be a good thing.

“Opposing views are needed to test the strength and conviction of an idea,” he says.

“Discovering that you may be wrong is only part of the story; having the flexibility to change your mind when you realise you are wrong is even more important.” Alternatively, an opposing view that is well refuted can help provide more confidence in your thesis.

Somaia puts forward a checklist to test whether investment objectives are properly defined:

  • Is capital invested for growth or to provide income?
  • What is the investment horizon?
  • Is there a real-return target or required level of income?
  • How vital is liquidity; are there any tax exemptions?

When a portfolio is scrutinised, fundamentals can be useful interrogation tools. Mitchell suggests this list:

  • The size of a company’s addressable market and how fast it is growing
  • The company’s growth rate within a market and market share
  • Is market share growing and is that growth sustainable?
  • Is the company generating cash or burning it (if so, how long can its balance sheet support that)?
  • Is return on capital higher than cost of capital?
  • How fast are earnings growing?
  • What does its valuation look like compared to its own history, the market and its peers?

Mitchell recommends investors go out of their way to find information sources that disagree with their views on investment strategy and individual stocks. “This will force you to challenge your own thinking and stress-test it.”

Does debate among fund manager colleagues ever get heated? “A great saying I heard once is: ‘emotive arguments are for wimps,’” he says. “Look, it’s great to be passionate in investing, but if there is no substance it is not going to get you far.”

Any work that develops a philosophy and a structured approach to implementing a strategy will help protect a portfolio from potentially damaging emotional decisions, Somaia says.

“Dedicating more time initially to portfolio design can reduce time and energy in managing the investment strategy,” he says.

Jeremy is a freelance writer based in Sydney. He has previously written for the Australian Financial Review and EcoGeneration.

This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend