Great Investors Don’t Listen to Robots

By |2021-04-05T05:24:50-04:00June 29th, 2017|Blog, Great Investors Series|

“Even if you could trick an algorithm into giving you the portfolio you need as opposed to the one you want—which you can’t—an algorithm can’t hold your hand, look into your eyes and advise you credibly not to worry when the market goes down 30%. You will still bolt out of your portfolio at the wrong time and for the wrong reasons.”
– Nick Murray

In last month’s article, we focused on “Taking advantage of Dividends” as one of the great qualities to adopt for anyone who wants to become a great investor. This month we focus on slightly different habit that great investors understand……Great Investors Don’t Listen to Robots.

The 80/20 Rule

Most of us have heard of the “80/20 Rule”, an observation by Italian economics professor Vilfredo Pareto, who noticed that 80% of the land in Italy was owned by 20% of the population, and that 20% of the pea pods in his garden contained 80% of the peas. These observations formed a principle that, in most endeavors, 80% of the results come from 20% of the efforts.

After many years of observing the investment markets and investor behavior, we have noticed a different kind of “80/20 Rule” at play in the investment markets over a long period of time. Specifically, we have observed that:

  • 80% of the trading days, the stock market experiences relatively low volatility, with a slight upward bias. Investors are calm and rational during these periods, and investing is relatively easy for most investors.
  • 20% of the trading days, the market experiences a great deal of volatility, either to the upside or the downside, and investors suddenly become quite emotional, either with extreme fear or euphoria. Investors are anything but calm and rational during these times, and are prone to making big mistakes.

During the “emotional 20%” of trading days, investment volatility has a way of bringing out the worst of investor behavior, and we all have a tendency to fall back on our hard wired proclivities to make the exact wrong investment decision, at the exact wrong time.

It’s Easy 80% of the Time!

Over most of the years of my collective advising experience, the majority of the trading days have been “pleasantly boring”. Stocks rise and fall on a daily basis, but usually by a small fraction of one percent. On an annual basis, stocks are up most of the time, usually within range of the long term average of 10% per year. Trading is not exceptionally volatile for significant periods of time, and investors are able to quietly and calmly build their portfolio values.

During these periods of relative calm, investing begins to seem easy, and investors tend to become complacent. It seems that all one has to do is set up an intelligent portfolio allocation of stocks and bonds, with the proper asset class and sector allocations, and let the markets do the work for you. Simply review your allocations a couple of times a year, and sleep soundly at night knowing your portfolio value is growing slowly over time.

It is during these times that investors begin to seek simple, inexpensive, “no frills” solutions to their investing needs. Since investing seems so easy, most people reason that all they need is a pie chart or an algorithm to help them achieve long term investing success. The latest version of this is the rise in popularity of “Robo Advisor” platforms, in which investors pay a fee to have their portfolio managed by a “robot”: simply complete an online profiling and risk tolerance questionnaire, and the “robot” spits out a recommended portfolio allocation, which will be automatically rebalanced on a regular basis”.

Easy as pie – investing is so easy even a machine can do it.

The other 20% of the Time

In our years of experience, 20% of the time conditions have been not quite so boring, as volatility returns with a vengeance, and stocks experience violent movements in both directions. Markets begin to appear chaotic and unpredictable, and people do all sorts of self-destructive things when their emotions take charge of their investing decisions. There are 2 primary categories of emotional investing mistakes, and recent history offers textbook examples of each.


Historically, the late stages of a Bull Market produce the best returns.

When a new Bull market begins, investors are tentative at first. The memory of the last Bear market is still somewhat fresh in their minds, and so they invest selectively and cautiously. As the Bull market extends into multiple years, investors get used to the good times, and begin to forget about risk. They become bolder and more aggressive with their investments, which can often drive eye-popping returns for the market as a whole, or the “darling” sectors that investors crave most.

The first fatal investing mistake comes from the high of investing euphoria during times like this. Investors begin to believe that the risk of losing money in stocks is zero, and that the only risk is that someone else somewhere is making more money than you are. Investors are consumed by the need to scramble at all costs, to own the same