“The Fault, Dear Brutus…”

I read a stunning Morningstar article the other day. Ken Heebner’s CGM Focus Fund returned an outstanding 17.84% annualized return over the last 10 years. While the market as a whole went down, CGM Focus would have multiplied your money by 5.2 times. Wow!

That’s assuming, of course, that you bought the fund and held on during all the ups and downs of both the market and the CGM Focus Fund. The return that Heebner’s actual investors received (as calculated my Morningstar)? Negative 16.82% annualized!

You might look at those numbers incredulously and wonder how on earth the fund could provide 17.84% returns while investors lost 16.82% annualized.

It relates to the title of this blog. As Shakespeare put it in Julius Caesar, “The fault, dear Brutus, is not in our stars, But in ourselves.” The reason investors get lousy returns is not due to fate, but because they shoot themselves in the foot.

How can a fund go up 17.84% annualized, but investors get -16.82% returns? Investors chase volatile performance. They buy after a fund had done well, only to find it top and roll over. After it tanks, they give up and sell, only to find it race back up again. Rinse and repeat.

Research clearly shows investors are their own worst enemy. Instead of formulating a plan and sticking to it through bumpy markets, they try to game the system. That’s why Dalbar studies have consistently shown investors get 1/4 of the return of the mutual funds they invest in–they chase performance!

It’s not just individual investors who do this, professionals chase performance, too. Jeremy Grantham of GMO talks about how he lost 60%–60%!!!–of his clients during the late 1990’s and early 2000. His clients were abandoning him because he “didn’t get” the dot-com boom. Grantham’s disciplined investment approach, of course, turned out to be right, and he provided brilliant returns for those clients who stuck around.

This lesson is counter-intuitive to most people, but vitally important to investment success. Markets move in fits and starts. Trying to time the market is a fool’s errand. The people who succeed over the long run stick to a disciplined and proven approach. Judging investment records by short term performance, even 3 to 5 years, isn’t enough. If a disciplined approach doesn’t look like it’s working, stay the course or–even better–put more money to work in it. Focus on the long term, even when it’s extremely hard to do, or hire someone who can do that for you.

Or, as Warren Buffett puts it, “be greedy when others are fearful and fearful when others are greedy.”

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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