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Host: Yes, this is your host Eric Reynolds, and Iím here with Byron Striloff, senior
investment advisor for CIBC Wood Gundy, and today weíll be talking with Byron about how
investor behavior is a critical part of increasing investment returns. Now, before Byron joins
us, just a reminder that if you have questions or require assistance, you can reach Byron
at 604-535-3700. Thatís 604-535-3700. Now hi Byron, itís great to talk to you today.
Byron: Hi Eric. Yes, Iím happy to be here.
Host: Now Byron since this is our first show, why donít you start off by telling us about
your practice and what kind of experience you provide for your clients.
Byron: OK. Basically, my practice is based on helping a finite number of successful households
or families build their wealth, safeguard their investments and preserve capital and
eventually pass those assets off to the next generation in a tax-efficient manner. Probably
one of the easiest ways you can think of what I do is as being a family or client CEO. I
would quarter back the decisions, the investment decisions, tax planning, estate planning,
and also coordinate and organise the other professionals like accountants and estate
planning lawyers, so in our business some people, some advisers or brokers where they
trade a lot of stocks. Iím more of an asset manager where we will determine what are the
most appropriate investment classes for people to be involved in and then I will select the
appropriate managers for the individuals. So over 30 years, Iíve managed this planning
process by integrating a behavioral economic investment strategy and a demographic investment
strategy as part of an intellectual foundation, and thatís for me to base my advice on. This
helps me forecast and manage change and it also provides a basis for what I call a forward-looking
investment strategy.
Host: Now speaking of strategy, you mentioned a behavioral investment strategy and a demographic
investment strategy. Could you explain those further, starting with the behavioral investment
strategy?
Byron: Absolutely. The behavioral strategy is based on human nature, and believe me,
thatís a very strong influence indeed. And because of human nature, real people do not
get investment returns. I say this at my seminars all the time. Real people do not get investment
returns, they get investor returns, and thereís a substantial difference, and the investor
returns are substantially lower. So, to give you an example of how that works, thereís
a group, itís actually two groups in the United States, Lipper Dalbar, and these people,
they do a lot of studies and mutual funds and performance and investors and what have
you, and one of the big studies they do is every couple of years, they take a 20-year
time frame and they study the average compounding rates or returns that they mutual funds get,
or the investment funds, and what the investors. And they follow the dollar average purchases
and sales to determine how investors do. I actually have got two examples here because
in my seminars I had a slide for 2007 that showed that the average large cap equity fund
in the United States has produced 11 percent for the 20-year period up to 2007 and the
investors earned 4 percent. I actually just looked up a more current oneóthey have one
for 2010óand again, the average large cap mutual fund produced 9.2 percent and the average
investor earned 3 º percent. Now thatís a 6 percent difference. And itís interesting
how consistent these numbers are. Over 20 years, the average investor manages to capture
probably less than half the return of the average fund, and of course I always think
this is very surprising because we live in a society thatís made a religion out of outperformance
or beating the market. But the average investor not only is underperforming the market, heís
actually underperforming, to a large extent, his own investments. Now, how does something
like that happen where we underperform to such a large degree our own investments? Well
actually, itís quite simple. If we take the mutual fund or any managed money product,
these products are designed to be long-term holding periods, and this would be somewhere
between 5 and 20 years, but, unfortunately, we live in a world of daily pricing, so investment
decisions are more motivated by swings in the market. So, what ends up happening is
that investors will contribute the largest amount to any investment after it has built
a superb track record. In other words, they buy the record. Then, investors will sharply
reduce their investments or sell their investments off entirely when, as it inevitably does,
performance starts to lag for a while. So, if we look at this pattern of investing, it
ensures us that most investors buy most heavily at above-average prices, which mathematically
guarantees below-average returns.
Host: Right.
Byron: And thatís how most investors significantly end up underperforming their own investments.
So, that brings me to the herd mentality. This is why I sort of watch this and study
this because behavioral economics has taught me that most investors, like other human beings,
theyíre susceptible to herd mentality. The crowd is overjoyed by a rapid rise in the
stock market and of course depressed when it falls. Then they end up trading too much.
So in doing so, they end up making mistakes, and thatís because theyíre playing a game
of follow the leader, jumping into popular investment after they already had a spectacular
rise, and bailing out at the first sign of disappointment. So, the inevitable results
become something that is certainly a Canadian or North American phenomenon in our business,
and itís the buy high, sell low strategy experience, and of course nobody achieves
their plans using that. So the truth is, the primary determinant of investment success
is not the performance of investments at allóitís the behavior of the investor. Long-term investment
success is almost totally a function of how one emotionally handles the decline in the
equity markets as opposed to how your portfolio handles it. I tell people itís more important
what you do as an investor when the market goes down as opposed to what your portfolio
does. So thatís one of the reasons why I as a professional adviser, I try to put my
time and energy into understanding what is driving the trend so I can help my clients
form an objective opinion and make the right investment decisions, and if history has shown
us one thing, all the most successful investors have distanced themselves from the mentality
of the herd. So, my time and energy is spent getting my clients to see the market as they
really are, so they can generate the type of returns they require.
Host: Wow. Great information, Byron. I appreciate it. Iím learning a lot, and Iím sure our
listeners are too. Now, weíre up against a break so weíll be right back with Byron
Striloff, senior investment advisor for CIBC Wood Gundy.
Host: Welcome back, and Iím here with Byron Striloff, and weíre discussing how investor
behavior is a critical part of increasing investment returns. Now, Byron, I can see
how the emotions could interfere with the investment process. Do you have any suggestions
for how people can mitigate the affect emotions can have on their retirement planning?
Byron: Well, we could rephrase that immediately. What would the average investor have to do
over a 20-year people to 11 percent that the market owned as opposed to what he earned?
Typically, what the average investor would have to do is he would simply have to buy
an average mutual fund or investment portfolio elect the dividend reinvestment and put it
in a drawer. Thatís all you would have to do. You would put it in a drawer next to your
other long-term investments, which is like your mortgage or your life insurance policy.
And then if you would have forgotten about it, it probably would have helped. However,
he didnít do that. He did something else. In fact, probably a whole lot of other things
which have three characteristics in common, and one of them is whenever you pull it out
and start looking at it youíre always going to do the wrong thing. Itís going to be done
at the wrong time and itís going to be done for the wrong reason. If I give an example,
and I was just thinking about this the other day, and Iím going to give the example of
Templeton Growth Fund. Iím not making that as a recommendation, Iím just going to use
that as an example because itís a household name that most people are familiar with and
itís been around for a long time. In fact, Templeton Growth Fund has been around from
1954 and since its inception until this year, Templeton Growth Fund has actually averaged
12 percent. 12 percent compound and growth over all those years. And mind you, there
certainly have been a lot of years there where it wouldíve been hard to sometimes hold that
investment, but it proves the point that if you make a good investment and hold on to
it, thatís what the market is capable of returning. So some of the things people want
to avoid to avoid inappropriate behavior, one thing we donít want to do is only buy
funds with the hottest recent performance. Thatís how our industry seems to be organised
and weíve got the star ratings for all these course of investments, and of course everyone
wants to buy these 5-star investments. And a comment on that is a portfolio 5-star funds
will either perform a portfolio of 1-star funds for the next five years or it wonít.
But I can tell you one thing, after 30 years in the business, thereís no way to know in
advance. Another suggestion is that when previously hot funds lag, thatís not necessarily the
best time to switch into the ones that are actually red hot winners at the time. You
probably want to stay with your investment. And something very important, during times
of market declines, for example 1987 comes to mind. But then thereís 1990, thereís
1998, thereís 2001, which was the tech correction, which of course 2008, which was a major bottom.
And those are all major bottoms in the last 20 years, when mutual funds went into massive
net liquidation. Typically, that is not the time to be selling and not the time to be
loading up on whatever represents the new era thatís coming around the corner. So,
I would end off by saying beating the marketóitís not a financial goal, and itís not a financial
plan. An income that a client does not live in retirement, thatís a financial goal. An
outperformance is not a financial goal, nor is it a plan for achieving an income that
one doesnít outlive. Host: Wow, again, thanks for the information
Byron. Iím sure myself and the listeners are learning a lot about this process. Now,
before we close out today, do you have any final thoughts or a story youíd like to share
with the listeners?
Byron: Well, itís interesting you ask that because I remember how this was really brought
home to me, and Iíd say it was actually 5 or 6 years ago, and typically when you do
your investment reviews, you see how people are doing. I had forgotten about a group of
people, or I had a group of people that have done very, very well, and I was thinking ìwhat
do these people have in common?î I started looking at some of the names, and then I realised
that I do have a few people that have been with me for like 25 years, and I had a group
of them that had really, really outperformedóand actually, their accounts had grown an awful
lot. And I had to think about that to think ìwhat was different about what they did?î
And these were people, and I wonít say that they were indifferent, but they were happy
to find someone that they trusted and leave the decisions up to me, and they just went
on with their daily chores and what have you, and they just trusted me to contact them and
make changes when it was the right time to do it. And because they werenít bothering
you ñeven in our business, itís very, very hard to have people sit there and want to
do something all the time. And even though we will believe in certain things and certain
principles, that if you do this youíre going to end up with better results, itís very,
very hard when people sometimes against your better judgments, you end up making changes
to make people happy. But I realized that this group of people, they just would never
call, they would only want to get in touch with me when I had something to talk to them
about, so I ended up only making changes when they really, really were necessary, and as
a result I realized that man, I really was surprised at how well they had done over large
periods of time, so that really, really brought that home to me about how effective that is
and it sort of motivated me to be a lot stronger going forward in my dealings with people when
weíre discussing what should be changed and what shouldnít be changed and what course
weíre on and when we should be keeping on that course.
Host: Man, Byron, thanks so much for the information for myself and for the listeners but weíre
out of time. So, if you need to reach Byron, you can do that at www.byronstriloff.com.
Thatís www.byronstriloff.com. And, of course, you can always reach Byron by telephone at
604-535-3700. Thatís 604-535-3700. Byron, once again, for myself and the listeners,
thanks so much for being with us today.
Byron: Thank you.
Host: Well, have a great day and weíll talk to you next week.
Byron: Okay, bye.