Many equity investors understand the benefits of long-term equity investing. Money works over time in quality companies. The music is playing, and the stock prices soar. As the music turns into minor and eventually cacophony, the investor’s mind begins to blacken, and the need for action is the only thing in mind.
Nobel laureate Daniel Kahneman became known to the general public in his book Thinking, Fast and Slow. One of the main messages in the book was related to slow and fast thinking. But how does this relate to investing?
Fast thinking is effortless. Problems begin when fast thinking interferes with the perception of complex things. According to Kahneman, in fast thinking, the automatic command of the brain helps us, for example, when a deer jumps on a car’s headlights.
Slow thinking requires a correspondingly disciplined and focused effort. It may reveal that many of the intuitive results were indeed cognitive illusions — more delusions than enduring conclusions.
When something is broken, you want to fix it
I find most people pretty rational. Nonetheless, when the debate turns to stocks and investing, some investors react surprisingly emotionally and irrationally. According to Kahneman, people freeze or act in crises.
When something is broken, you want to fix it, says James Norton, investment adviser at fund management company Vanguard. It is one of our basic needs that we must protect ourselves.
When you see that the value of your portfolio is falling, it is very natural to take action to protect it. You immediately sell the stock whose value drops, and you get a good feeling.
According to Greg Davies, an expert at consulting firm Oxford Risk, the more closely an investor feels about daily or even hourly changes in the market, the greater the likelihood of impulsive decisions.
That is how a long-term investor turns into a short-term trader.
We feel uncomfortable when we do nothing
An active investor is a more interesting character than a rational and calm investor. However, intense trading, confirmation biases, and herd behavior can lead to losses that weaken the portfolio’s performance.
We try to manage the situation by taking an active role when we feel anxious and powerless. Often the best recipe for a long-term investor would be to do nothing and resist the pressure of fast thinking.
Self-discipline and emotional balance may be more critical qualities in characters than what is generally considered intelligence.
The biggest challenge for an investor is not the market unpredictability but the investor’s unpredictability.
Psychology, or at least intense self-reflection, helps determine whether I am an investor, owner, or gambler anyway?
The added value of the Sifter fund for the investor
Sifter’s investment strategy is to own high-quality, growing, and healthy companies worldwide and stick to them in both stock market ups and downs. We manage a portfolio as a team effort that helps take advantage of slow thinking and prevent fast impulsive actions. We have been doing this for 20 years soon.
The added value of Sifter to the investor is the consistency of the investment strategy and the discipline in complying with it.
The fund has faced the financial crisis of 2008, the 2020 stock market crash, and several more minor market corrections. The most significant annual decrease was in 2008 (-35.6%), and the best year was 2021 (34.4%). Despite the roller coaster, the quality companies of the Sifter Fund have provided investors with an average compound annual return of 10% after all expenses (2003/06-2021/12).
Sifter investors have outsourced some of their asset management to an experienced team and get its complete expertise at a reasonable price.
Santeri Korpinen
CEO, Sifter Capital
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