Today I had the pleasure of listening to professor Elroy Dimson who is the Emeritus Professor at the London Business School. He is also Chairman  at the Centre for Endowment Asset Management, Cambridge.

I have also read the article written by him , David Chambers and Charikleia Kaffe in which they studied the investment behaviour of various University Endowments  which had been investing since 1945.

Try to act countercyclically

Part of the abstract at the beginning of the article make the comment

“ We then analysed how they invest at the time of crises and the extent to which they exploit their long-horizon advantage. We found that, on average, endowments invested countercyclically at crisis times, particularly by increasing their allocations to risky assets after a crisis.”

The abstract is saying is that it is important when investing for the longer term to act counter to your head is telling you. There is a tendency for investors to be fearful when markets are falling and therefore they sell assets. They become excited when markets are rising which encourages them to buy assets. This is not only common among individual investors. The study also noted the same behaviours in institutional investors, such as pension funds.

This is what Naess (Analysts Journal 1949) states. “The fear of losing capital when prices are low and the greed for more capital gains when prices are high and rising are probably more than any other factors responsible for poor performance”.

Therefore investors should attempt to be countercyclical. They should buy when the market is falling and sell when the market is rising. This is an easy thing to say, managing our investment decisions may be more difficult than that.


Rebalancing is a particular example of countercyclical investing. This is when the portfolio is taken back to the asset allocation it started with. For example 60% equities and 40% bonds. If the stock market rises, so that the portfolio is 70%/30%, then some equities should be sold. Bonds are bought to bring the portfolio back to the 60%/40% split. Perold and Sharpe (1988) explained in this Journal how countercyclical investment can capitalize on reversals and thereby outperform a buy-and-hold strategy. Building on this argument, Ang (2012) and Norges Bank Investment Management (NBIM 2012) claimed that rebalanced portfolios display both higher returns and lower risk than do passive strategies.

Another important aspect of investing that was highlighted by the professor is that compound interest is the most powerful force to man in terms of investing. Compound interest provides accelerated returns, to both capital and income as growth or income is reinvested into more assets. The result is ‘growth on growth’ as the returns compound.

Professor Dimson also highlighted the fact that investors can pay too much for investment management. This is both in the cost of ongoing management and the costs of changing your mind, or switching investments or strategies. By choosing a good manager it is easier to assess the costs of changing your investment. By taking heed to the behavioural aspects of investing you may avoid inadvertent market timing and either miss out on capital growth or increase losses.

Tenets for investing

The report highlights a number of tenets

1          Investment markets are highly efficient. This means that information required to invest is available to everyone when they decide to invest. Therefore there is little advantage to any investor.

2          Long term investors should allocate a high percentage of their portfolio to stock market assets. This will enhance the growth and provide higher income over time.

3          Market timing is a futile exercise

4          All investors should be mindful of the effects of taxation on their portfolio