The wisdom of great investors #2

The wisdom of great investors #2

“Emotions can wreak havoc on investor returns. Keeping them in check is critical to building long-term wealth.”


Charles Munger
Vice-Chairman, Berkshire Hathaway


In this second of a series looking at the wisdom of great investors, we focus on the impact that emotional decision making can have on investment outcomes.

Emotions can wreak havoc on investor returns. Keeping them in check is critical to building long-term wealth.

Emotions chart


Source: Davis Advisors and Quantitative Analysis of Investor Behaviour by Dalbar, Inc. (March 2016) and Lipper.* Past performance is not a guarantee of future results.

Unfortunately, when faced with periods of inevitable market volatility, investors are often guided by their emotions. This leads to self-destructive behaviour, such as timing the market, avoiding equities despite attractive low prices and abandoning financial plans altogether.

Over the past 20 years, investors who keep their emotions under control built nearly twice as much investors who were driven by their emotions: US$44,219 versus US$24,930.

To build long-term wealth, investors must remain disciplined, unemotional and focused on long-term goals in the face of inevitable market volatility.

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Important information
This material provides general information only and has been prepared without taking account the objectives, financial situation or needs of individuals and should not be used as the basis for making investment, financial or other decisions. This material was issued by Pan-Tribal Asset Management Pty Ltd (Pan-Tribal) ABN 35 600 756 241 AFSL 462065.

Pan-Tribal does not give any warranty, guarantee or representation about the accuracy or reliability of the information contained in this document and disclaims any and all warranties, express or implied in relation to the accuracy or reliability of the information. Past performance information provided is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance. Investing involves risk including loss of capital invested.

The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalisations and represents approximately two-thirds of the total market value of all domestic common stocks. Investments cannot be made directly in an index.

Charles Munger is not associated in any way with Pan-Tribal Asset Management, Davis Advisors or their affiliates.

* Dalbar computed the “Return of the Average Stock Fund Investor” by using industry cash flow reports from the Investment Company Institute. The “Average Stock Fund Return” figures represent the average return for all funds listed in Lipper’s US Diversified Equity Fund classification model. Dalbar also measured the behaviour of an “asset allocation” investor who uses a mix of equity and fixed-income investments.

The annualised return for this type of investor was 2.1% over the time frame measured. All Dalbar returns were computed using the S&P 500® Index. Returns assume reinvestment of dividends and capital gain distributions. All figures are in US dollars. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. The performance shown is not indicative of any particular Davis Advisors or Pan-Tribal Asset Management investment.