Those who started buying shares for the first time in the heady days of 2020 might have received a rude shock this year.
For many, it will have been the first time they saw their investments fall significantly. Some of their stocks might even be in the red.
This can be unsettling for rookies, but experts warn this is all part of investing.
In fact, if a person can’t handle that some of their holdings might lose value then, arguably, they should examine whether they have the stomach for investing.
The world’s most famous stock investor, Warren Buffett, warned last year that “some people are more subject to fear than others”.
“If you can’t handle it psychologically then you really shouldn’t own stocks, because you are going to buy and sell them at the wrong time,” he told the 2020 Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) annual general meeting.
Forget 100%, a 60% win rate is excellent
So how do the professionals avoid losing?
The short answer is they don’t.
Professional fund managers know better than anyone that they can’t pick all winners. They realise that the most one can lose on each share is the invested amount, but the most one can gain is infinite.
So they’ll settle for just getting it right the majority of the time.
“To be perfectly honest, we target getting 60% of our decisions correct,” Sage Capital portfolio manager Sean Fenton told Ask A Fund Manager this week.
“I don’t think a lot of people realise because everyone does have a bit of a hindsight bias. You always think that knowing things is easier than it actually was.”
Does it seem like 60% is a low goal? Well, it’s not just Fenton that thinks this is an appropriate bar.
Famous US fund manager Peter Lynch once also declared “6 out of 10” to be an excellent strike rate.
“You’re never going to be right 9 times out of 10.”
Investors love remembering their wins and forgetting their losses
Fenton told The Motley Fool the trouble is that investors have “very selective memories” — remembering their wins and forgetting about their losses.
After all, when’s the last time you heard at a barbecue a friend talk about their 30% loss?
But every share portfolio contains negative returns, like it or not.
“If you don’t do the hard accounting and actually track your investment decisions and work out your wins and losses, people tend to overestimate their skill,” said Fenton.
“But we do do that and if we can get 60% of our investment decisions right, it means we’re absolutely knocking it out of the park.”