Lesson time for investors

By PHILIP MACALISTER

We all want to be good investors and make our money work for us, but what is it that makes a good investor?

To answer that question, you would think the obvious person to turn to would be a psychologist or someone in the human sciences or behavioural finance field.

But, somewhat surprisingly, the Russell Investment Group has also come up with some useful answers. Surprising because Russell is one of the big names of investment research, whose recommendations can move billions of dollars.

One of Russell's senior staffers from Seattle, Andy Turner, was in New Zealand recently, talking about the "four Ps" of investment.

These were not the Ps you normally heard about - performance, process and portfolio. Rather they were: passion, perspective, purpose and progress.

Such human characteristics were not known for being easy to measure, but Russell had tried to do just that and to prove that they were the characteristics that made investors successful.

Turner said that when Russell did research on fund managers, its analysts were not just asking the technical and statistical questions, but making observations about the managers.

Take passion, for example.

Turner said investors with passion were highly motivated and intensely competitive. They liked working with similar people and were focused on excellence.

He said investors with passion tended to attract similarly passionate people and that could spur some high-quality debate which helped generate good results.

One of the questions analysts asked themselves about passion was: "Compared to other firms, how well does this firm's leadership and culture inspire, motivate and provide direction to key professionals?"

Managers were ranked and put into one of three categories and those ranks were then compared with their investment results.

Russell's research showed that those in the highest rank generated significantly better returns than the other groups.

"Passion is tangible [in investors], you can see it," said Turner.

The next P - perspective - was a little different and came through in many different ways.

With individual investors it was about keeping check on decisions, whether the results had been good or bad and then acting appropriately on them.

"Every retail investor wants to tell you about the last stock they bought - how many of them talk about the last stock they sold?"

Russell had found that having a strong sell discipline was absolutely essential for success.

Turner said the strength of that discipline varied, depending on the type of approach that an investor took. It was particularly important when someone targeted "growth" stocks as there was a chance he or she would pay too much for that expected future growth.

Being disciplined about when to sell was much less of an issue for investors who sought out under-valued shares, because they were not buying stocks for too high a price in the first place.

But Turner said they needed to ensure they did not hang onto stocks that were "truly a dog".

If the stock fell investors had to ask "was it more of a dog" or was the mispricing increasing?

Turner said that question brought up the concept that the behavioural finance texts described as being "anchored", sticking to beliefs when factors changed or were just downright wrong.

"There is not a slick trick as to how to prevent that. You just have to be aware that it is a human trait."

Investors with the third P - purpose - were committed to their investment philosophy, disciplined, accountable and focused.

This was something investors had to look for when they were considering options such as a managed fund, and whether a manager stuck to their declared strategy.

It came through in individual investors, when people spelled out what their process was.

It could also be seen in the world of property, when an investor developed a set of criteria that any potential property purchase must meet.

Turner said it was vital that investors were committed to their philosophy and had purpose.

"The key thing a lot of retail investors fail at is that they may have a process and they may stick to it but they are bad at being completely accountable for the results they are get. They make too many excuses."

The final P - progress - encompassed the ability to keep learning and accept change when necessary.

Turner said investors who progressed were comfortable with change and learned from their mistakes.

"The successful investor is willing to take new evidence and change their mind."

This was an area where the institutions and professional investors had an advantage over the retail investor. They could "deeply analyse the data and understand it".

In Turner's view, having depth of research had essentially become table stakes in the game of investment.

Individual investors had to decide whether they were in the investing game to make money or for the entertainment value.

To be a successful investor you had to measure progress and quality.

"You can't be serious about investments if you are not measuring your performance," he said.

The ideal firm had all four characteristics - passion, perspective, purpose and progress - in abundance.

"We are looking for all four things in managers. If they don't score well across the board we are not going to hire them for our own funds."

Turner said that there was no such thing as the ideal investor or firm - in reality they just did not exist.

ADVICE FOR INVESTORS

* Stay focused.

* Measure progress towards your goal.

* No excuses.

* Evaluate successes and failures objectively.

* Don't overreact to failure.

* Be patient and disciplined.

* Learn from mistakes.

* Get comfortable with change.

* Philip Macalister edits personal finance website Good Returns.

* Email Philip Macalister