“United States Wins 6 in a Row!”
No, this was not a recent World Cup headline, but US stocks did notch their sixth consecutive quarter of gains as of June 30. So while we wait another four years for a shot at American soccer glory, we can at least draw an investing lesson from “The Beautiful Game”.
In his book “Value Investing”, James Montier describes a 2007 study which measured the success rate of top-level goalkeepers in defending penalty kicks. It was found that approximately one-third of penalty kicks were aimed at the left side of the goal, one-third toward the center and the remaining one-third to the right. Goal-keepers, however, jumped to the left or right to stop the ball 94% of the time (as opposed to staying in the middle, where kicks were just as likely to be directed). Ironically, the statistics also showed that, by far, goal-keepers’ best save rates occurred in the middle section of the goal area.
Apparently, athletes, like the rest of us, are prone to “action bias”. That is, when confronted with the possibility of failure, people generally prefer to at least portray some semblance of activity than to do nothing at all. “Don’t just stand there, do something” is a powerful admonition (especially when dispensed by expectant fans, peers or clients), but as the soccer illustration shows, it can at times be flat wrong.
More than five years into a bull market, it is becoming more difficult to find quality companies selling at bargain prices. We believe that much of the investment management industry is engaging in a form of action bias: continuing to buy even low-quality stocks at ever-increasing prices to avoid doing nothing. Many would rather keep up with the market in the short-term than temporarily fall behind by holding cash.
Rising cash balances have undoubtedly dampened our funds’ performance during the run-up, but the game is not yet over. Time will tell whether the current posture of “just standing there” with a portion of the portfolio in cash has provided a benefit by reducing the risk of significant impairment in the next downturn. Investing, like watching soccer, requires patience!
Aaron Pettersen, CFA, CFP®