As a 20 year old backpacker hitchhiking through Europe I had planned to run with the Bulls in Pamplona Spain, unfortunately I never made it to Spain.  But thinking back as a fearless or stupid youngster this was probably a saving grace as each year a few unlucky runners get badly hurt.   But what has this got to do with investing.

I would like to use this story to explain the pitfalls of choosing or evaluating funds / managers based on recent past performance.   I have titled the article, “Running with the Bulls” in reference to the risk of switching out of an under-performing fund / manager into last year’s winner.  This is a classic behavioural finance bias error of selling cheap to buy expensive, which just like the unlucky Pamplona runners usually ends in tears.

Stock markets are efficient at valuing assets over the long-term and completely inefficient at doing the same through short-term cycles, which is why Benjamin Graham, author of The Intelligent Investor, referred to the stock market as a “weighing machine” over the long-term and a” voting machine” over the short-term in reference to the irrational sentiment driven mispricing of businesses during short-term market cycles.

Every business has an intrinsic value, which can be calculated based on earnings and earnings growth expectations; however the share price of the business may trade well above or below the this intrinsic value depending on investor sentiment.   At times, when investors are positive, they are prepared to pay too much for a business and at times, when they are overly negative, they sell their shares at below the actual value.   It is during these sentiment driven cycles that astute investors are able exploit mispricing opportunities to make money.

When evaluating a fund / manager it is important to measure performance through a full cycle either from peak to peak or from trough to trough.  The full cycle includes performance in the up and in the down-cycle.  It is no good making a lot of money through excessive risk taking in the up- cycle and then losing it all in the down-cycle.    Long-term out-performance comes from making money in the up-cycle and then protecting the gains in the down-cycle by limiting losses and recovering quicker.

The current problem in defining short-term as a 2-3 year period versus long-term as 5 – 7 years is that we are now 6 years into a bull market post the market low of Feb 2009.  In most investors mind this is a long-cycle and thus a true reflection of a managers skills.  However, this is not the case as we have only been through the up-cycle and the true test of skill will only be evident after the next down-cycle.

Investors need to be mindful if they are selecting funds / managers or passive index tracking investment strategies based on the last 6 years performance.


Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746

Running with the Bulls
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