Investor Behaviour, A roller coaster of emotions!

Managing Emotions

Whether it’s euphoria or anxiety, allowing emotions to seep into investment decisions can be costly. Instead, prudent investors should aim to emulate the unemotional approach of a professional portfolio manager, a mindset that can be achieved with solid due diligence, a disciplined investment process and a sense of perspective, according to three frontline experts.

There’s probably no better way for investors to remain unemotional than through the confidence that comes from doing their homework. While it’s impractical, if not impossible, for the average investor to research every company that their mutual fund may invest in, they can research how the fund’s manager makes investment decisions. “From the investor’s perspective, they should understand the process by which their managers are researching these companies,” says Michelle Savoy, relationship manager for Capital Guardian in Toronto. “If the managers have a process in place which allows them to go out and find these good companies, we feel this is what will hold investors in good stead in the long term.”

Fund manager Sébastian van Berkom uses a “highly fundamentally oriented” research process that determines what kind of price range a stock should trade at to keep his emotions in check. “We take a cold-blooded approach to investing where doing our homework is the only trick,” says Montréal-based van Berkom, who manages the Talvest Small Cap Canadian Equity fund. “The key is knowing the company inside and out, knowing what the company is worth fundamentally on a long-term basis and sticking to valuation levels that are realistic for that company.”

Maxime-Jean Gérin, first vice-president of global asset allocation and currency management at TAL Global Asset Management in Montréal, advises that investors should not react to news as it’s published. As a portfolio manager, Gérin avoids this emotional trap by using a “scenario approach,” whereby his team prepares for any sudden surprises by imagining different scenarios involving world events and capital markets. “If you’ve gone through the discipline of figuring out what is most likely to happen, then you are able to prepare an outline of information ahead of time to ensure that it will be published in a timely fashion in response to the occurrence of a surprise situation,” he says.

Gérin also suggests that investors keep their emotions in check by distancing themselves from the day-to-day “hurricane” of information from newspapers magazines and television. “If you have your nose too close to the screen, trying to understand every wiggle in the movement of the stock or bond markets, then you’re going to lose perspective,” he says.”You can make sure your emotions don’t get in the way by creating some distance and understanding that the capital markets do not move in a straight line.”

July 2002

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.