Holly Cook: As investors, sometimes we can be our own worst enemies. Joining me today to talk a little bit more about that is Lars Kroijer. He is a former hedge fund manager and now, an author of books on how to invest.
Lars, thanks for joining me.
Lars Kroijer: Thanks for having me.
Cook: So as a former hedge fund manager, you hit the headline several years ago for actually losing millions of pounds in one day. So you know firsthand what kind of mistakes can lead to. Why don't you tell us, you are going to give us some of your three main mistakes investors make? Give us your number one?
Kroijer: So the first and I think the most important mistake investors make is that they think they can beat markets. So they think they have an edge to somehow perform better than the aggregate market. So what does that mean, it means in stock markets, as an example though it applies elsewhere, it means that you think you can somehow do something different from what the market has already done to create a superior risk return profile.
You think you can pick better stocks. You think you can pick better active fund managers. The overwhelming likelihood is that you cannot. And I am arguing you should not try, you are going to be far worse off for trying. That's the biggest most important mistake people make.
Cook: So therefore we basically have buy and hold strategy.
Kroijer: You are index tracking strategy. Circumstances change in people's lives, and their risk profiles change over time which is why I wouldn't say blindly buy and hold, but certainly avoid trading a lot. As the primary cause of underperformance among retail investors is we are somehow programmed to do something different, do something active with our savings and I think conventional wisdom has is that we are clever for doing so.
Cook: So would that be your sort of second gripe with our investors, make mistakes. So are they overactive?
Kroijer: Well, I would call it one and a half. Because if you can accept that you don't have an edge to beat the markets, you wouldn't trade a lot.
Cook: Right. So they interconnect.
Kroijer: It would make no sense. It would make no sense to do so. So that I would throw it in as the one and a half if you would allow me.
Cook: So what would be your second one then?
Kroijer: So the second one I think is if you can take a step back from financial markets for a second and say well, what are your overall assets in life? So, your overall assets; one component hopefully, is your investment portfolio. For a lot of people the other component is their job. It's their house or their apartment. It's their education. It's their potential future inheritance. It's a lot of stuff.
Now, one mistake that I think a lot of people make, particularly in London is that there is a massive concentration of all their assets. To use yourself an example. You work in the financial sector. You have a pension that's perhaps from a company in the financial sector.
Cook: I do.
Kroijer: You have a flat in London or a house.
Cook: I do. Yes.
Kroijer: You may be even from here and this is where your future job prospects lie.
Cook: I am.
Kroijer: If you also have your investment portfolio in London-centric real estate stocks that is an undue and unnecessary and crazy concentration of risks. You are essentially setting yourself up in a way that everything can go wrong at once. And I think particularly when you look at one of the greatest wealth generators for the average Londoner over the last couple of decades has been their real estate investment, their house, their flat.
Now that is a geared investment in a rising market. So you can have a £100 and go to the bank and still borrow £400 or £500 on that and buy a flat and you really, really hope that it doesn't drop 50% because then you are in real trouble. Now if you on top of that invest in a portfolio of securities that are tied to the same thing as that flat, you are adding to an already pretty significant concentration for most people. And I think that's a huge mistake and I think it's something people should avoid or think very, very hard about.
Cook: I'll be running off after this to make sure that I haven't got any of my portfolio in London real estate.
Kroijer: Yes. Or sell the flat.
Cook: Okay. And what would be number three then?
Kroijer: So the third thing I think people need to think about is the long-term implications of what they do with their savings. I think we are all guilty of being programmed that equity markets are something we should invest in for the long run, because it will give us superior returns to more stable bond returns or cash in the bank.
Now I think that's a dangerous thing. I think we can't assume that equity markets are going to up over the very long run. It could be that over the next generation equity markets are down 80%, 90% and people need to be very clear what that would mean to their retirement planning and how would it impact their life.
Now take yourself as an example again. You are young. So if you lost all your savings in the equity markets you would have a lifetime to make up for it and compensate. Now if you lost all your equity holdings or half of them, and you are two years from retirement that's a terrible, terrible thing for you to happen.
Cook: As we saw just a few years ago for a lot of people here in the UK.
Kroijer: Absolutely right. No, well taking a further step and say Japan as an example. When I was at university, not to date me, it was in the early '90s. We were studying Japan as a miracle. Since I graduated university, the Japanese stock market is down 75%. So that's 20 years ago. It's almost this summer 20 years ago that I graduated university. So if you had a £100, you would now have £25. That's devastating. People need to think about that and plan for that possibility.
Cook: So what does that mean in practical terms? Does it mean sort of always be fearful or does it mean you just need to understand your own portfolio?
Kroijer: I am by nature paranoid. So always be ready for that possibility. Always think very hard about how do you plan the de-risking of your portfolio over time. So away from equity markets as you can no longer afford the risk that those entail. And I think people do too little of it. Again almost like the apartment example, because we get lulled into the sense that everything is going to be fine, because they always were and but they may not be. That's how I think a mistake a lot of people make or not think long and hard enough about.
Cook: Well, I know you got into much more detail about these mistakes and more in the book. Thank you very much for the brief synopsis.
Kroijer: Thanks for having me.
Cook: For Morningstar, I am Holly Cook. Thanks for watching.
