Would have, could have, should have. The human brain is good at regret. And no-one does it better than a stock market investor. The last week has provided a great illustration of how we beat ourselves up about our investment choices. We should avoid it. It’s bad for our wealth.
A week ago, I concluded - prematurely, it turns out - that investors were unlikely to rush into Chinese stocks in the wake of Beijing’s helpful but, we thought, insufficient monetary and fiscal stimulus. Five trading sessions later, the CSI 300 index that tracks Shanghai and Shenzhen listed shares had risen by 28 per cent and Hong Kong has picked up the baton, now the mainland is on its holiday.
Errors of omission are felt less keenly than those of commission. But missing out on this kind of free lunch is still hard to take. Especially if, like me, you have been banging on about how cheap Chinese shares are for months on end - but done nothing about it.
Remorse is a powerful emotion. It is different from the panic felt by an investor when an unexpected market shock fires up our rapid-response, reflexive brain. It is a slower-burn, reflective feeling, experienced in the cold light of morning when you allow yourself to wallow in what-ifs and how-could-I’s.
So, let’s give ourselves a break. Yes, it would have been wonderful to have hit Invest Now when news emerged from Beijing that the government had reverted to its ‘throw money at the problem’ default.
But to have predicted the market’s reaction, you would have had to disregard the conventional wisdom a week ago that the proposed measures were a positive development but nowhere near enough to stabilise China’s crumbling property market or to lighten the mood among the country’s depressed consumers. There’s nothing like a market melt-up to convince investors that the rally they’ve just missed was predictable.
Cutting interest and mortgage rates and downpayment requirements, alongside lending and swap facilities to encourage companies to buy back their own shares and to prod institutional investors to buy local equities, was innovative but not yet the bazooka it has been called. A week ago, every China investor I spoke to was saying something along the lines of: ‘let’s see’.
The other thing to bear in mind if you’re kicking yourself over missing the China rally is that over anything other than an extremely short time frame you have done yourself a big favour by steering clear of the Chinese stock market. If, two weeks ago, you’d looked at the one-year returns from US and Chinese shares, you’d have been comparing a 26 per cent gain for the S&P 500 with a 15 per cent loss for the CSI 300. As of the end of September, after the rally, the comparable year-on-year numbers are still heavily in favour of the US - plus 34 per cent for the S&P 500 and a 9 per cent gain for the Chinese benchmark.
If, like many investors, you did not benefit from the rally in Chinese stocks, you were probably the victim of portfolio paralysis. This is our tendency to freeze, not just when we regret something that we have done or not done but even when we simply anticipate that feeling of regret. The paralysis is worse when we have to actually do something because the sting of regret is sharper when it is triggered by action rather than inaction.
If you had previously experienced a loss during the 45 per cent fall in the Chinese market since the February 2021 peak, you would be even more likely to freeze in the face of last week’s buying opportunity. Having made one mistake, you would have been terrified of looking even more foolish when compounding it with another.
If you have missed the upswing, you may now be vulnerable to what I call the ‘near miss fallacy’. This is what happens when you fixate on what might have been; not just what did happen but what you think could have happened. It’s similar to the pain suffered by the Olympic athlete who just misses out on a gold. Incidentally, it’s why silver medallists are often less happy with their achievement than the winner of the bronze (whose near miss was not getting on the podium at all). For an investor the near miss can lead to chasing returns, trying to get a second bite of the cherry. And as James Goldsmith liked to say, when you see a bandwagon, it’s too late.
Hindsight is a wonderful thing, and unavailable to investors. To understand why you should not beat yourself up about missing out on an unexpected stock market surge, reframe the question by asking what you think you should do today. If it is not obvious whether you should invest in Chinese shares now, after their 28 per cent rise, then it probably wasn’t clear before they shot up either.
Regret is a dangerous emotion for investors. It saps your confidence and pushes you to make poor financial decisions. So how can you avoid it? First, set yourself some rules and stick to them. You might, for example, decide not to invest in markets where there is too much government interference. Or to avoid those that trade on more than 20 times expected earnings. Whatever then happens, you are less likely to have regrets because you know there was a good reason for what you did or didn’t do.
Second, protect yourself from the reality that you won’t get everything right. The best way to do this is to be extremely well diversified. You don’t want one good or bad decision to be the difference between achieving your financial goals and missing them. Finally, take market timing out of the equation. A systematic and regular investor never regrets their decisions because they don’t need to make many. When you’re on a road with speed cameras, it’s best to engage the cruise control and enjoy the ride.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
