If you’re trying to live off your investments or to supplement your income with them, then you probably do quite a bit of investment analysis to better inform your decisions. This is a wise thing to do, of course, and no one could really argue with it. Many private investors justifiably pride themselves on their in-depth analysis an overall market insight. But when it comes to the really big decisions, this isn’t always the right approach.
In some situations, when looking at the bigger macro picture, and the big investments, instinct can be superior to detailed knowledge.
Let’s start with property. Had you been a keenly analytical investor in property, you probably wouldn’t have invested in the UK market since somewhere around 2003-2005. Based on multiples of average income, or rental yields, most properties haven’t made much fundamental sense. Yet they’ve generally continued to rise. And according to the source on HSBC newsroom – comparing “property haves” with “have-nots”, the financial outlook for today’s 25-36 year olds who have managed to take the first step on the property ladder is generally a lot better.
That isn’t to say that if you haven’t invested in property over the last decade or so you’ve lost out. You may have made better investments elsewhere, in the stock market for example. But here again – it’s often the big instinctive decisions that play better in the long run than the detailed numbers analysis – particularly when it comes to the largest blue-chip companies.
In these situations, there’s often not much point really careful analysis etc. It’s more or less impossible to get any particular insights as all the information pertaining to a company is already in the public domain and is very heavily analysed by many, many professionals.
So if you can zoom out a little and trust your own instincts, particularly when it comes to being a little contrarian and running against the herd of popular opinion, it often pays off in the long run.
In other words, it’s usually wise to try and ignore the relatively short-term details concerned with today’s news – and instead to look at the absolute basic long-term value of companies. This often involves buying on the “glitch” – i.e. having the courage of one’s convictions that bad news is temporary and the long-term value will come out over sufficient time.
So, for example, investing a lump sum into the stock market at the end of 2008 or early in 2009 when the financial crisis had had its biggest impact on the markets would have been a wise thing to do. The same can be said for buying shares in BP shortly after its Gulf of Mexico disaster. But it can be a dangerous game and they don’t all come off.
Nevertheless, in such cases, a lack of detailed knowledge can be a positive boon. Ignorance can be bliss and focussing one’s horizons on the very long term and ignoring the current day to day “noise” can pay dividends in the long run … literally.