This year’s Nobel Prize winner for economics has done more than just win a prestigious award and author numerous books—he has also created an amazing track record as an investment fund advisor. Richard Thaler’s unique approach to investing is drawing attention from people around the world, and many are trying to mimic his personal style.
Strong Fund Growth
Winner of the recent Nobel Prize for economics, Richard Thaler is a behavioural economist and principal at Fuller & Thaler Asset Management. One of the hallmarks of the group is that it advises a $5.8 billion Undiscovered Managers Behavioural Value Fund (UBVAX) that has nearly doubled the S&P 500’s gains since the start of the bull market. Since the market began to climb in March 2009, Class A shares of the fund are up 512%, while the S&P 500 has increased 277%. Growth at the fund is due to more than just market increases—it comes from smart investments and huge boosts in investor deposits; UBVAX has beat 99% of its peers in the past three and five years.
However, just because UBVAX focuses on smaller stocks, it is still rather expensive to own. Net fees are 1.44%, and the fund has only climbed around 8% this year, far below the S&P’s 14% increase.
Investing Tips from a Nobel Prize Winner
UBVAX’s amazing success has obviously drawn attention from experts and novice investors around the world, many of whom want to follow in Thaler’s footsteps to grow their own investments. Thaler uses his experience in behavioural economics to help him know what downtrodden companies are ready for a rebound and would be good additions to the rest of his small-cap stocks in the portfolio.
What’s the secret to Thaler’s success? A combination of research and intuition.
“What we try to do is put academic research to use,” he said. “We’re interested in the dogs that are going to look better. … We’re an active manager, so we think we can beat the market by a little most of the time. Our methods are kind of a hybrid. We don’t fit neatly into a single quant versus judgmental box. We use judgment based on academic-style rigorous testing.”
Thaler combines psychology with traditional economics. For him, it isn’t all about just the numbers—there is a personal level involved as well. He watches things like market trends, company leadership changes, and consumer behaviour to make educated investments. He also looks for things like signals of insider buying, such as the CFO suddenly doubling his holders.
“Beware of Overconfidence”
Although Thaler may be one of the best in the business, he prefers using a quality portfolio manager to purchasing his own individual stocks. His biggest warning to other investors is to be cautious and educated.
“I think the biggest mistake people make is overconfidence. They think they’re better investors than they are,” he said. “My number one advice would be, keep track. If you think you’re a hot shot investor, really try to compute what your rate of return is. We know that a majority of active managers fail to meet their benchmarks after they’ve paid their fees.”
Thaler recommends that people do their research and have a good understanding of the market. With a strong foundation, people can better predict and understand how outside events effect the rise and fall of companies. Thaler is often described as an optimist, but he has worked to make sure that attitude doesn’t become a bias in his investing decisions.
On paper, Thaler’s investing approach may seem simple, and his combination of behavioural psychology and economics has obviously brought him great results. Not everyone is guaranteed success by following his plan, especially without Thaler’s decades of experience. However, the approach could lead to a better view on investing and change how people approach the market.