Sale of the Century was once one of world's most-watched TV quiz shows. The format, originally devised in the United States in the late 1960s, was so successful that it spawned versions in at least 13 other countries. One of the show's biggest talking points was an interesting twist at the end, when contestants were shown what they could have won but didn't. What can it teach us about investing and regret? One of the most popular television quiz shows of the 1970s and 80s was Sale of the Century. The UK version was produced by Anglia Television, and each show began with the words, "And now, from Norwich, it's the quiz of the week.” At its peak it attracted more than 21 million viewers. The format of the show allowed contestants to accumulate “money” through answering questions correctly. This money could then be used to buy prizes at significantly reduced prices. For whatever reason, the thing I remember most about Sale of the Century is the twist at the end. If a contestant had not spent all their accumulated money on prizes during the game, the host, Nicholas Parsons, showed them what they could have won with their remaining balance. The prizes typically included fur coats, expensive holidays and often a car. Regardless of what they had actually won, it was a sting in the tail for the contestants - a moment of realisation of what could have been theirs had they made different choices during the game. For the viewers, it added a layer of drama and engagement. I still recall the look of disappointment on contestants’ faces and feeling a little sorry for them.
Financial media outlets do the same
Reading the money pages of the weekend newspapers is rather like being shown what you could have won at the end of Sale of the Century. In the immortal words of Jim Bowen on Bullseye, that other well-known ITV quiz show, "Look what you could have won!" If only you had spotted the potential of this stock before it went viral… If only you had realised that such-and-such a fund was going to perform so well… If only you had bought into this cryptocurrency before its value soared… If only you had bought a buy-to-let flat in this once rundown district where rents and prices have rocketed. If only. That’s all you had to do. Why didn’t you spot the opportunity? And how can you make jolly sure you don’t miss the next one?
Why we regret “missed opportunities”
If you’ve had thoughts like these, you’re certainly not the only one. In fact, it’s part of our evolutionary make-up to regret the choices we’ve made in the past, and to imagine how much better life would be if only we had acted differently. Psychologists call this counterfactual thinking. It’s often heightened by social comparison; to see others benefit from opportunities that we somehow managed to miss can be very painful. Closely related to it is what’s called FOMO, or the fear of missing out. This is a social anxiety that stems from the belief that others are having rewarding experiences which we ourselves aren’t. Essentially, it’s a by-product of the human desire for social belonging. But, in the context of investing, regret and FOMO are wholly irrational and a waste of time and energy. Worse than that, they are potentially very harmful to investment outcomes.
Regret and FOMO are irrational
Why is that? Well, let’s go back to basics. The financial markets are broadly efficient. By that we mean that all knowable information is already reflected in current prices. Prices move in response to new information, which, by definition, is all but impossible to predict. In the short term, then, price movements are entirely random, and it’s very unlikely that any one individual knows more than the aggregated wisdom of the whole market. The only exception is inside information, and trading on that is illegal. There are thousands of funds to choose from. At any one time, there is bound to be a fund with excellent recent returns, simply by the law of averages. But, over the long term, on a properly cost- and risk-adjusted basis, outperformance is extremely rare. It is human nature to see patterns where none exist, and to believe in powerful narratives that journalists and experts in PR and marketing so skilfully produce. We're also prone to biases such as recency, salience and availability. One of the problems with investment performance is that it’s very hard to distinguish skill from random chance. Humans are vulnerable to what’s called self-attribution bias, which makes us more inclined to attribute positive outcomes to the former rather than the latter. So, for all of these reasons, we’re more attracted than is good for us to articles that tell us how much better off we would be if only we had acted in a certain way in the past. The financial media knows this, and so do the firms that advertise in financial publications. They know they have a captive audience.
Patient diversification is a superior strategy
What, then, should investors do when confronted with these sorts of stories? One response is not to read them at all. Another option is to read them, but more critically than you may have done in the past. So for, example, ask:
- Although, in hindsight, you can see the benefits of buying this or selling that at a particular point, was it really obvious at the time?
- Did the journalist who wrote the article, or the outlet they work for, recommend this course of action when others didn’t?
- Can I be sure that the stock or fund the article recommends will continue to outperform in the future?
The rational answer, I would suggest, to all three of those questions is No. Remember: past performance is almost completely irrelevant. All that matters is future performance. Very often, a fund whose recent returns are very impressive has benefited from a particular style of investing. But styles come in and out of fashion, often at breathtaking speed, and a fund manager who appears to be a genius today can easily look like a dunce in a few months’ time. The logical way to invest is to ignore the latest fads and fashions altogether. Invest instead in a cheap, efficient and, crucially, broadly diversified portfolio. Yes, there will always be an opportunity cost to diversification. In the short term, you will always have “missed out” on something. But don’t be downcast like those contestants on Sale of the Century on learning that they wouldn’t be driving home in the shiny new Mini Metro they could have won. History shows, time and again, that patient investors who diversify are usually well rewarded in the end.
FIND OUT MORE
Want to find out more about rockwealth Norwich and how we can help you to achieve your goals? Then give us a call or send us a message. We would love to hear from you.
© rockwealth MMXXIV
