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Investment Insights: Seven Sins of Fund Management

Placing forecasting at the heart of the investment process; illusion of knowledge; believing everything you read... and more sins

Morningstar Editors 24.09.2014

Years ago, James Montier, then with Dresdner Kleinwort Wasserstein, came out with a white paper titled Seven Sins of Fund Management that looked at how behavioural finance can affect the investment process. Though penned almost a decade ago, the advice is timeless and has not diminished in value over the years.

Sin 1: Placing forecasting at the heart of the investment process 
Forecasting is an integral part of our lives. Even the weather is subject to it. But an enormous amount of evidence suggests that investors are generally hopeless at it. The core root of this inability seems to lie in the fact that we all seem to be over-optimistic and over-confident. The answer probably lies in a trait known as anchoring, which means that in the face of uncertainty we will cling to any irrelevant number as support. So using forecasts as an integral part of the investment process is like tying one hand behind your back before you start.

Sin 2: The illusion of knowledge
This obsession with information stems from the efficient market theory: if markets are efficient then the only way they can be beaten is by knowing something that no one else does. Investors believe that to outperform they need to know more than everyone else.

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