Fund managers talk a lot about valuations, risk metrics and investment process – and the most honest ones acknowledge an element of luck in some of their most successful bets.
But there is a pretty large elephant in the room that many investment professionals try to downplay. That elephant consists of emotion, stress, behavioural bias, personality traits and past experiences; the very human elements of decision making.
Now BlackRock is acknowledging the importance of both the mental and physical states of its portfolio managers. It is working with certain portfolio managers to help them track their stress levels and heart rates to understand how they are impacted by volatility in markets.
Several investment professionals at BlackRock are wearing Oura rings to monitor everything from their heart rates to the quality of their sleep. This data can be compared to market movements.
The research is ongoing and BlackRock has observed that most people become more stressed when volatility spikes. No surprise there. But what is really interesting is that a minority of people have positive physiological responses in these scenarios as they evaluate potential investment opportunities.
Personally, I think investors have two behavioural finance issues to grapple with at the moment, given where markets are.
The first is a version of FOMO (fear of missing out) experienced by everyone who doesn’t own Nvidia, or US tech stocks, or by extension US equities, or for that matter a passive global equity tracker.
Not so much FOMO but the cast iron knowledge that you have actually missed out. Let’s invent a new three letter acronym: AMO.
AMO can be depressing and paralysing and can prevent investors from being able to objectively analyse the situation today with a blank sheet of paper, in order to figure out if they should buy now.
Even if they missed out on past gains, is there a profitable opportunity going forward?
This is why I admire the managers of the Baillie Gifford European Growth trust for drawing a line in the sand and buying Novo Nordisk recently. Yes they missed out on its extraordinary performance to date but they haven’t let that “painful omission” (in their words) stop them from participating in the exponential growth potential for obesity drugs going forward.
The second behavioural bias that might be hampering clear-sighted investment decision-making today is recency bias.
Do people think US equities will be the best-performing regional equity market going forward just because it has been in the past? That is an oversimplification to illustrate the point, but investors do seem to have forgotten the tech bear market of 2022 remarkably quickly. US mega-cap tech stocks are priced as if it’s a near certainty that the stunning growth of the past year or so will continue onwards.
Or maybe I’m just really grumpy about mega-cap tech because of my AMO.