Investors are still being governed by emotions, rather than facts, Platinum Asset Management founder and chief executive Kerr Neilson says – and it’s costly.
Speaking at Morningstar Investment Conference 2018, Neilson told the assembled audience that “we don’t need to remind ourselves how emotional decisions are when it comes to investing. There is a tendency for people to lead with their emotions, as you know, and underweight the facts.”
Neilson used two assets classes as an example: residential property and Australian equities. While both are rated ‘high conviction’ in terms of how investors feel about them, the evidence for residential property’s eminence is weak while the case for domestic equities is strong.
To demonstrate the veracity of people’s conviction, Neilson said we should look at their willingness to borrow.
“When most people buy physical property, they are quite comfortable with gearing,” Neilson said.
Despite knowing that property is a “much less tradeable asset” than equities, “they see shares completely differently and they’re very disinclined to borrow with shares”.
While Neilson stressed that he didn’t necessarily encourage borrowing for shares – “there’s plenty of debt out there, I’m not promoting that” – he questioned why investors were prepared to do it for one asset class and not the other.
“If you’d bought a [$500,000] house in the year 2000, and it went up fourfold, so it’s now worth $2,000,000, that would only be a compound gain of about 8 per cent,” Neilson explained.
He compared this result to global shares, which has been “great”, and his own Platinum International Fund, which has “done 13 per cent”.
The issue professionals face, Neilson continued, is that their clients believe they can read the market. When they see a dramatic headline “they fret incessantly”.
Neilson used some historical data to reinforce the idea that the spectre of loss in the equities market is more fanciful than the reality. Even if investors went into equities “at the worst possible time”, such as October 1929 or September 2000, over a five-year period, they would have lost only “about 6 per cent”, he said. “However, if you came in after one of these crises, you could have had a three-and-half fold increase in wealth in that five years.”
Neilson also cited figures showing that world markets lost only 31 per cent of their value in World War 1 and 12 per cent during the World War 2, but 54 per cent during the 1929 sharemarket crash and 44 per cent in the dotcom downturn of 2000.
“The point I’m trying to raise here is that when you think about emotions, they do more [economic] damage in some cases than war,” Neilson said.
