Worried trader

Summary List Placement

One way to get investing right is to simply be less wrong.

No reasonable person expects all of their decisions to work out, investment-related or otherwise. But eliminating some basic sources of error can be a powerful advantage, and it’s helped Fred Stanske’s Fuller & Thaler Behavioral Small-Cap Growth Fund beat the returns of 96% of other small-company growth stock funds over the last five years.

Fuller & Thaler manages $9.3 billion and invests based on concepts researched by co-founder Richard Thaler, the  2017 winner of the Nobel Prize in Economics. Stanske has worked at the firm for more than 20 years, and in an exclusive interview, he told Business Insider how it avoids common mistakes and takes advantage of the errors others are making.

Stanske’s fund is now nine years old, and a $10,000 investment at its inception would have become $28,151 today, according to Morningstar. That compares to $22,358 from the same investment in the S&P SmallCap 600 index.

Over the last five years, the fund has returned 8.3% a year, well ahead of the 4.9% annual return of an average fund in the category.

2 investing mistakes to avoid

One of the most important biases Stanske tries to avoid, and the reason for Thaler’s economics prize, is called the disposition effect: Investors sell their winners too quickly, hoping to lock in profits, and then hold their losers for too long, hoping their performance will turn around.

Both mistakes drag down performance and turn wins into average results. Stanske tries to take advantage of that by buying stocks that are already on the rise, but where investors are getting out too early.

“What we’ll see is a large piece of positive information comes to the marketplace. The stock will react to that information,” he said. “There will be lots of sellers because of that disposition effect. And it gives us the opportunity to buy that stock, if we believe that there’s some sort of permanent change at the company.”

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If he picks the right stocks, they won’t just surprise Wall Street once. They’ll beat expectations over and over for a year or more. The reason, he explains is anchoring. Once an investor or analyst has made the effort to get informed about a company, there’s a good chance they’ll be too slow to update their views, paving the way for repeated surprises. 

“We’re all overconfident to a great degree in what we know and what we think,” he said. “What we try to do is take advantage of that overconfidence when people are anchored to their old models on companies.”

One way he and his fellow managers avoid overconfidence is giving their peers some credit. That’s one reason they only start examining stocks once they’re on the way up. He’s looking to confirm the reasons for an existing rally instead of predicting one that hasn’t started yet.

“If there’s any sustainability to it, whether it’s a new product or structure, new management and distribution, and …read more

Source:: Business Insider


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