Three basic ingredients will help make you a successful investor: a defined strategy, discipline and time. That sounds very straightforward, but like many activities, putting the theory into practice is much easier said than done.
Humans haven’t evolved into great investors. We generally follow the crowd and naturally avoid risk, which is less likely to lead to outperformance.
Why is this? Historically, it’s always been risky to be the person out on your own. In prehistoric times, for example, everyone slept together in a cave. If one caveman decided to spend a night under the stars instead, the chances are he wouldn’t be coming back in the morning – easy pickings for a sabre-toothed tiger.
Our evolutionary bias is to follow the wisdom of the crowd, escape from danger and avoid discomfort. That’s what has kept us alive, but these tendencies aren’t beneficial when investing and potentially have serious consequences. The tendency to do what other investors are doing leads to buying the same well-liked securities as others, with a ‘great story’ attached, and that have performed well recently. Humans feel comfortable holding those securities, but the downside is that when comfort bias is driving decision making, investors could overpay for the asset.
At its worst, market bubbles form, where later participants significantly overpay for assets and are the biggest losers when the bubble bursts and stocks come crashing down.
Buying and selling at the right price is paramount to investing success. Morningstar’s ‘Mind the Gap 2024’ report1 shows that most investors consistently get this wrong. The Report’s findings include that fund investors earned a 6.3% per year dollar-weighted return over the 10 years until December 31 2023, while their fund holdings earned about 7.3% per year, and that these results aren’t an anomaly, they are broadly in line with the gaps measured over the four previous rolling 10-year periods in prior Morningstar studies.
The Report’s findings also include that the 1.1% annual estimated return gap stems from mistimed purchases and sales.
Investors can fall victim to buying shares that have already performed strongly (following the crowd) then panic-selling when they fall, rather than reassessing the situation. Compounded over time, investors are giving up a substantial amount of performance.
Investors, on average, get the timing wrong
Emotional drivers can have seriously negative effects on our end results when investing, so what can we do about it?
To invest well, you have to embrace discomfort
There’s a great quote from Howard Marks, of Oaktree Capital:
“If your portfolio looks like everyone else’s, you may do well, or you may do poorly, but you can’t do different. And being different is absolutely essential if you want to stand a chance at being superior.”
Marks makes a great point here, to perform differently you must invest differently.
To outperform you have to invest differently, which means embracing the fear of not following the crowd. Here are three ways you can do this:
1. Volatility is your friend. If stocks rose in a straight line, there would never be any bargains. Use price dips to buy more if your investment thesis remains intact and sell when the stock reaches your assessment of its true value. Look for buying opportunities when others are selling and sell when others are buying; the price you pay is paramount. A rigorous approach to buying and selling securities helps manage losses and lock in gains.
2. Don’t sweat the macro. The macroenvironment needs some consideration, you can’t be oblivious to the environment in which your companies operate, but you shouldn’t make investment decisions based solely on external matters that a company cannot control. Stay aware of external factors, but don’t let them be the sole decision driver. By investing with a bottom-up mindset, not top-down, every security is fighting for its rightful place in the portfolio.
3. Pay attention to what you can understand. Fundamental analysis of companies, studying financial statements to understand earnings, profitability and competitive advantages, can help you determine a stock’s worth. Know your stocks inside out, so you are ready to act if news changes; decision making should be reflective, not reflexive. Knowledge and careful planning help you make intelligent decisions. You don’t fix your gutters when it’s already raining – be prepared.
At Allan Gray we’ve been investing differently for almost 20 years in Australia and how our broader group has been investing globally since 1973. To learn more about our contrarian investing strategy, our funds and how we can benefit your client portfolios, please visit our website or contact your local business development manager.
Equity Trustees Limited ABN 46 004 031 298, AFSL No. 240975 is the issuer of units in the Allan Gray Australia Balanced Fund ARSN 615 145 974, Allan Gray Australia Equity Fund ARSN 117 746 666 and Allan Gray Australia Stable Fund, ARSN 149 681 774 (Allan Gray Funds) and units in the Orbis Global Equity Fund (Australia registered) ARSN 147 222 535, Orbis Global Equity LE Fund (Australia registered) ARSN 613 753 030 and Orbis Global Balanced Fund (Australia registered) ARSN 615 545 170 (Orbis Funds). Allan Gray Australia Pty Limited ABN 48 112 316 168, AFSL No. 298487 is the investment manager of the Allan Gray Funds.
Past performance is not a reliable indicator of future performance. There are risks involved with investing and the value of your investments may fall as well as rise. This represents Allan Gray Australia Pty Limited and Orbis Investment Advisory Pty Limited’s view at a point in time and may provide reasoning or rationale on why we bought or sold a particular security for the Allan Gray or Orbis Funds or our clients. We may take the opposite view/position from that stated, as our view may change. If this article is authored by Orbis, it does not prohibit the Orbis Funds from dealing in the securities before or after this article is published. This article constitutes general advice or information only and not personal financial product, tax, legal, or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person and may not be appropriate for you or your clients. We have tried to ensure that the information here is accurate in all material respects, but cannot guarantee that it is. We accept no liability for any errors or omissions.
You should consider the relevant funds’ Product Disclosure Statement (PDS) or Information Memorandum (IM), as applicable, before acquiring, holding or disposing units in the Allan Gray or Orbis Funds. The PDS or IM can be obtained from www.orbis.com.au and www.allangray.com.au. Target Market Determinations (TMDs) for the Allan Gray products can be found at allangray.com.au/PDS-TMD-documents, while TMDs for the Orbis Funds can be found at www.orbis.com.au on the ‘Forms’ page under ‘How to Invest’. Each TMD sets out who an investment in the relevant Allan Gray or Orbis Funds might be appropriate for and the circumstances that trigger a review of the TMD.
REFERENCE
1. Morningstar ‘Mind the Gap: A Report on Investor Returns in the US’ report, August 2024.
