Concept #1: Loss aversion is a concept encapsulated in the expression “losses loom larger than gains” (Kahneman & Tversky, 1979). As per this psychological concept, the pain of losing is about twice as powerful as the pleasure of gaining i.e. one who loses Rs100 will lose more satisfaction than the same person will gain satisfaction from a Rs100 windfall.
Concept #2: Short term (less than 12 months) performance of an equity portfolio is significantly affected by noise. The tools that can help deliver consistent short-term outperformance over benchmark indices usually bring with them the risk of compromising long term (3 years or longer) absolute returns. For instance, Berkshire Hathaway’s monthly performance has exceeded that of S&P500 in only 51% of historical instances, despite the firm having outperformed the index over most long time horizons. At Marcellus, we focus on a healthy rate of compounding of fundamentals for our investee companies as the key driver of long-term portfolio performance – an absolute return focus which also results in healthy returns relative to the benchmark over the long term.
The interplay: The psychological impact of loss aversion ensures that equity investors analysing portfolio performance over short time horizons will more often be disappointed than satisfied, even for the best possible long-term outcomes.
We believe in saying it as we see it when it comes to communicating our investment philosophy. Alongside the weekly blogs and the monthly newsletters where we share with you openly our thoughts and beliefs around investments, we would like to help answer any questions on your mind that we may not have addressed in any of our communiques. If you are not receiving our blogs and newsletters, pls write to sales@marcellus.in and we shall make sure they reach you. You can also access all our past blogs, webinars and newsletters on our website www.marcellus.in
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