John Rogers tips to avoid behavioural biases & amass stellar returns

John Rogers is a successful fund manager who is also known for his charitable work. He is the founder and lead portfolio manager for Ariel Investments.

Rogers has become a highly acclaimed investment manager by successfully amassing stellar returns by spotting undervalued companies that he believes will realize their full potential over the long term.

Rogers has been recognized as one of the best money managers of the modern era, alongside Warren Buffet and John Templeton. He has been on the board of numerous civic, educational, and arts organizations.

Rogers was introduced to stock investing by his father who was a lawyer, at the age of 12 and he quickly fell in love with it. Roger's dad gave him $250 worth of bluechip shares for each birthday and Christmas.

“I looked forward to reading quarterly reports, and newsletters that gave you ideas. He let me keep dividend checks, so I learned about the connection between profits and dividends,” he said.

Rogers says the key to becoming a successful investor is to have a lot of patience.

"We remind people every chance we get to think out over the horizon and not get swept up with short-term emotions in the market. I always tell people that Warren Buffett reminds us that in the last century the Dow Jones industrial average rose from 66 to more than 11,000. That was a century with a pandemic, depression, two world wars—so many extraordinary tragedies, disruptions and recessions, and things that you could never imagine—but the market just steadily moves higher. I tell people, whatever the drama of the moment is, this too shall pass," he says.

Rogers says investors should target the real leaders in industries like high-quality companies with the ability to grow faster and have true moats around them. "Moats are the most important element. We learned that from Warren," he says.

Rogers has also incorporated behavioural finance into his investment strategy over the years. Rogers explained several elements and biases of behavioural finance that can be useful to investors to amass stellar returns. Let's take a look at these biases.

The endowment effect: Rogers says investors often make the mistake of falling in love with a company and then overvaluing it which leads them to incur losses in the long run. “Maintaining your objectivity is important,” he says.

The recency effect: Rogers says investors often get swept up in the euphoria or depression of the moment. “People have an inability to look over the horizon,” Rogers says.

Anchoring: Rogers says investors often get tied to old views which leads them to block new vital information which can help them in achieving stellar returns. “People are uncomfortable moving their earnings estimates in light of new information,” he says.

Confirmation bias: Rogers says investors often fall into the trap of reading content that matches what they already believe in which makes them miss out on other important factors. “You have to look outside your comfort zone and hear a contrary perspective,” Rogers says.

Rogers says to fight these biases, investors need to deploy devil’s advocates to make a negative case for each of their portfolio holdings.

“That’s critical to success because it’s so easy to get swept up in biases. We want to make sure we always hear the other side of the argument and that we don’t fall in love with our companies. There’s something called the endowment effect in behavioural finance, where people just naturally fall in love with what they already own. It’s something you want to protect against. A devil’s advocate helps us stay away from value traps," he says.Image

Rogers says investors should look for new ideas by reading and talking to people they trust. "When an idea surfaces that seems to have merit, we assign someone to do a preliminary report—and someone else to be “devil’s advocate,” warning of the pitfalls of the purchase. The next step is to visit the site, a trek often made by senior members of the team," he says.

Rogers says investors should spend sufficient time evaluating the quality of the management team. "Value traps often happen when the management team is wishy-washy, not sure of their plan or making acquisitions that are inappropriate, expensive or outside of their circle of competence. Those kinds of managers we stay away from," he says.