It’s been recounted many times in books, blog posts and YouTube videos, but it’s a story that never gets old.
During World War 2, the US military was analysing how to reduce aircraft casualties. The most obvious place to analyse damage information were the planes that were making it back to base. The damage those planes incurred were bullet holes on the tail and wings, with the engine often spared.
At first glance we all might think “we can see all the damage on the wings and the tail, we need to offer the wings and tail more armour”. This is what the US military concluded. Statistician Abraham Wald offered a different take. The US military were only seeing the planes that were surviving their mission. Those planes were surviving while taking bullets to the wings and tail. The planes weren’t seeing much damage to the engine because the planes incurring hits to the engine likely weren’t making it back to base. The wings and tail didn’t need more armour because those hits weren’t fatal. It was the engine that was the most vulnerable and needed more protection.
Wald’s story of plane armour has become one of the most famous ways to illustrate survivorship bias. It’s very hard to make an informed judgement about the success of anything if we only look at the winners, the survivors, the richest, or the most successful. Maintaining perspective on successes can be hard. Who does the media want to interview? Who writes all the books about success? Many lessons come with a healthy dollop of survivorship bias.
When it comes to investing, survivorship bias is generally seen as a bad thing. It’s a smokescreen. Something that throws investors off course and can distract their attention. The big wins are always an attraction for the media. On a more personal level, friends, family, or work colleagues are more likely to offer up their successes while not saying a word about their losses.
These tales are often picking the one company that went up 10,000% or more, maybe getting in on the ground floor of a mining company and riding it from the first drill hole to a producing mine. Investors can hear these stories and reach the conclusion that this is the path to success. They need to identify the next Amazon or Google early, or find a mining explorer sitting on a rich, undiscovered deposit of easily extracted minerals.
It’s needle in a haystack stuff. The overwhelming majority of companies don’t go up anywhere near 10,000% and 99% of exploration tenements don’t become mines. There’s competition, regulatory issues, sovereign risk, good timing. It’s not all skill and intelligence, luck also plays a factor in surviving and thriving. The chances of success are slim. Given the number of companies listed, they’re more likely to pick a dud, but how does an investor know until it’s too late? Part of surviving is looking past all the hurdles when you’re unable to see the future. It’s possible to look past all the hurdles, yet still crash into one.
However, linking survivorship and investing isn’t always a bad thing. Applying the lessons of survivorship to more feasible goals offer investors a greater chance of being successful, without the need to chase returns.
The most successful investors are survivors. They have to be. Investors invest because they expect returns, but they don’t always appear when they want. Historically, markets are positive two out of every three months, but that’s over a long timeframe. A sequence of bad months may cluster and test patience. Bad years in every asset class aren’t common, but they aren’t unheard of. 2022 has been one of them. Despite doing everything right, by holding a well-diversified portfolio aligned to goals and risk tolerance, an investor may still have a poor year.
While being a survivor in other areas can be a combination of talent, good fortune, and commitment. If you’ve constructed an evidence-based portfolio, being a survivor when investing primarily comes down to commitment. Investors, be they advised or not, can cut and run if they get frustrated. There are plenty of aimless investors out there looking for the next thing because they gave up on the last thing.
What helps with commitment is data and historical perspective. Stocks are on a better footing than they were earlier in the year, which is pleasing because we always say it’s best to stay seated, as returns are lumpy. Year to date (end of November) the ASX All Ords Accumulation Index is actually up 0.36%, Global Stocks (MSCI World ex Australia) are down -7.44%, but in both instances if an investor had an allocation to value stocks, as many clients do, those numbers would be better.
The real stinker this year have been bonds. Depending on duration, year to date (end of November) the losses have been mild: -0.51% for short term fixed interest, annoying: -3.16% for two-year fixed interest, and maddening: -6.49% for five-year fixed interest.
The question is what happens next. Excluding the current bear market in fixed interest, most Australian bond indices and global bond indices hedged to the Australian dollar have only seen one (two maximum) negative calendar year since 1990. The universal negative year in 1994 was followed by strong returns in 1995. The yield on fixed interest is now attractive, and if inflation has peaked, any fall in rates will see an increase in bond prices. It’s a recipe for more fruitful returns in bonds.
Surviving when investing is not about luck and it’s not about picking the one in a million shot and hoping a spec company makes it through all the turmoil to go up 10,000%. It’s a more realistic pursuit. The success will be incremental and borne out over a long period of ups and downs. Holding a portfolio of quality assets, understanding they aren’t always going to perform as we expect, but having the commitment to look past the turmoil and focus on the end goal.
Returns referenced: “-0.51% for short term fixed interest” is Dimensional Short Term Fixed Interest Trust (net of fees). “-3.16% for two-year fixed interest” is Dimensional Two-Year Sustainability Fixed Interest Trust – AUD Class Units (net of fees). “-6.49% for five-year fixed interest” is Dimensional Five Year Diversified Fixed Interest Trust – AUD Class Units (net of fees). YTD returns ending November 30, 2022.. This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs. Looking for a Canberra financial advisor? We now have an office in Bungendore, covering the Canberra/ACT region.
