From the rise of DIY investing apps to the volatility of meme stocks and Bitcoin, Ed Mawle, senior investment director at TrinityBridge Cheltenham, explores how emotional decision-making and behavioural trends are reshaping investment strategies in an age of digital disruption and economic uncertainty.
What does the phrase 'investment psychology' mean to you and how does it come into the day-to-day processes at TrinityBridge?
So when we're talking about investment psychology, we're really talking about behavioural psychology. Even though we are professionally retained by our clients to invest their money, we're still human beings who make the same mistakes every other human being makes.
We're emotional creatures and, especially given the huge responsibility that our clients place on us, if we see a market's falling and can't quite make sense of it ourselves or we can't measure when it's going to end, we have to be very careful at self managing ourselves and rely on our olders and wisers so that we don't make rash decisions during these such times. A lot of our clients come to us because if left to their own devices they may have hit the sell button too soon.
So that's what investment psychology means to us — management of emotions.
Have you noticed any recent trends with your clients investment behaviours? Has there been a shift in recent years?
Momentum investing is now quite a significant trend, a factor that is increasing in popularity.
The longer a stock stays at a good level, the more tempting it is to anchor future expectations based on what's happened in the past and that's why momentum investing is so powerful because it can work for long periods of time. It's also why passive investment has been so successful, too.
If you think of the Bernie Madoff scandal of 2008. Faith was put in the fact that he could do 10, 12, 15 per cent a year, year in and year out, and that made everyone complacent to the idea that he could repeat the performance of previous years — simply buying into reputation and momentum without really understanding the risk.
In terms of the investment psychology when it comes to momentum investing, it shows that we need to be alert to the risks that we're actually taking with our money and not to confuse lack of volatility with lack of risk.
What do you make of the rise of DIY investing platforms and so-called meme stocks and how is TrinityBridge staying on top of investing trends?
The shift we've seen in the last 20 years is a huge democratisation of knowledge. People have so much information at their fingertips and that has coincided with the rise of online DIY services such as Monzo and Nutmeg, etc.
Young people nowadays probably think nothing of having a gambling or investment account app on their phone or putting money into Bitcoin, but Bitcoin is pure momentum and this feeds into the whole idea of meme stocks.
The meme stock phenomena of current times, so GameStop and even Tesla to some extent, is a different animal to the .com boom that we saw in 1999, which I lived through. And when it comes to the market movements of these stocks, I think we all need to accept more volatility than we've been used to.
I think it's great that more people are interested and have access to information so that they can do it themselves — but this is not a threat to us
Because it's the advice around it and it's the handholding and the investment psychology insights that we've gained through experience that people come to us for.
A 25-year-old who goes on a DIY app and puts their first bonus on a meme stock and then two days later goes to see they've lost half of it, how are they supposed to manage their emotions in these situations? That's where that experienced advice is essential.
In terms of how we're staying on top of trends, TrinityBridge is embracing technology with our own app that our clients can use to monitor their investments on a day-to-day basis and we are embracing technology in the way that we research companies, assimilate information and disseminate it to our colleagues
Which personal biases, such as herd mentality, overconfidence, loss aversion, etc. would you say are most frequently affecting your clients' decision-making when it comes to investing?
The vast majority of our clients use us so that they don't have to think about it, often meaning we have full discretion over our clients money.
This is probably quite a scary thought for some — (ie delegating the day to day decision-making powers of investment to someone else) — but after a long period of getting to know our clients and them getting to know us, where we take time to discover their objectives, the time horizon, how much volatility they're prepared to suffer and establishing their capacity is for loss etc, they do come to trust us.
Many of our clients have been with us for decades, so when the Trump tariff news was sounding off, of the many many clients we work with, we took calls from maybe ten — they don't panic because we've held their hand through tough periods in the past.
Herd mentality is probably the most common behaviour we see. Sometimes we'll get a client who, after a dinner party chat or scrolling on social media, has heard someone talking about a popular stock and will call us saying 'oh my word, it's risen 70% shall we get some?' or 'what's your view?' But by the time your gardener or taxi driver or milkman is telling you how well they've done in any given asset, everyone's already in and the time to act may have past.
You mention selling. How does TrinityBridge approach sell discipline? Do you use tools like stop losses?
We often get asked about stop losses by people that have self-managed their money or perhaps come from a trading background, but we are not traders, so we don't employ stop loss tactics.
What we do is look very carefully day-to-day and challenge ourselves as to the investment thesis of every company on a regular basis. If the investment case is unaltered but the shares have fallen 10 or 20 per cent, that is an opportunity to buy more shares and to lower our break-even price.
We try not to let price and moment (up or down) influence our convictions — and that is easier said than done! That's the perennial problem for any fund or investment manager. We liken it to being in a horse race.
If we knew where the finish line was and backed the horse that's the best over three miles, we'd know which horse to back. But the race never ends.
So we have to weed out the ones that are falling back in the herd and find one that's going slightly faster and coming up the front. We do this by recognising when some companies get overvalued and sell on valuation grounds.
There's never an exact science to it but as Warren Buffet said, 'rule number one is to never lose money. Rule number two is to never forget rule number one.' So we try very hard to not sell at a loss.
How do you see the psychology of investing evolving in a world that's increasingly shaped by AI, ESG expectations and shifting economic cycles?
There's the Efficient Market Hypothesis dictates that at any given time the share prices should be perfect — but again, that investment psychology and herd mentality into account.
So in other words, the Efficient Market Hypothesis, whilst grand in theory, goes completely out of the window in markets when there's a liquidity crisis or when the fear gauge goes up or the volatility index rises and that is our opportunity to add value as human professional investors.
During periods of market stress and uncertainty, the algorithms get triggered to sell and the market goes into a bit of tailspin, so regardless of technological advancements, human behaviour and psychology will always have a role to play, along with fundamental analysis and charting technology.
So put these three together and that understanding is what moves markets — only humans can have all three. With those three understood, one should do better rather than worse in their investment decisions.
