In an always-on, connected world, distractions are around all the time. We have well over a hundred television channels available 24 hours a day, seven days a week. The internet connects us all globally and many of us carry it with us on our mobile phones. Social media networks have rapidly increased the speed with which news, ideas and thoughts are spread. Companies and people go out of their way to capture our attention. There is no shortage of talking heads predicting the hottest new investment. This constant flood of information feeds the fear of missing out and our tendency to be overconfident. These are powerful drivers of our behaviour. In this environment, maintaining focus is a daily challenge.
Henk Pieterse and Zwelethu Nkosi discuss why a focused approach is so important in investing and explain the logic behind our new advertising campaign, which claims 'distraction is the enemy'.
The campaign thought
Over the past 10 years, our advertising has aimed to tap into universal human truths to communicate our brand. Our new campaign continues this tradition by pointing out one of the pitfalls that make us human, our vulnerability to distractions.
Staying focused and committed over the long-term is an important part of successful investing, but human emotions cause even the most focused among us to be pulled off-track. The temptation to change our strategy in pursuit of something more enticing puts our long-term goals in jeopardy. Our key campaign message is simple: while distractions are part of what make us human, ignoring them is what makes us Allan Gray.
OUR KEY CAMPAIGN MESSAGE IS SIMPLE: WHILE DISTRACTIONS ARE PART OF WHAT MAKE US HUMAN, IGNORING THEM IS WHAT MAKES US ALLAN GRAY.
While it is important to stay informed, investors can easily be distracted by the constant supply of news and information. The following four examples illustrate what we believe are some of the most common pitfalls to avoid when you are a value-based long-term investor:
1. Macroeconomic predictions
Sandy McGregor notes in his article: 'Occasionally financial markets become totally obsessed with a particular issue'. The same can be said for many investors, who have added the unconventional actions of central banks to their favourite conversation topics, which include the exchange rate, the price of gold and opportunities in emerging markets. While asset prices have been affected by quantitative easing and will most likely be impacted by its end (called 'tapering'), it is very difficult, if not impossible, to predict the long-term impact. Investing based on predictions is inherently uncertain. As the old adage goes: 'the trend is your friend, until it ends'.
2. Geographies or industries that are the flavour of the month
With developed economies like the US and EU still recovering from the biggest recession since the great depression, emerging markets have become attractive investment destinations. The rise of China as an economic powerhouse has been nothing short of spectacular. It is tempting to invest in a country like China, after all, with a GDP per capita growth rate consistently above 9% per year since 2000, it should be a fertile source for investment growth.
What makes sense intuitively does not always play out as expected. When GDP growth is high and things are going well, investors seem to think this will translate into strong future returns for companies in a particular country. In fact, this is often not the case. Strong economic growth often leads to increased competition and a surplus of capital being invested in a specific economy, all of which may result in lower corporate profits. South Africa is a good example of the inverse: our stock market has had a fantastic decade or so, while economic growth has been muted.
3. News headlines of the day
It is worthwhile remembering that the headlines are about what is newsworthy, and bad news sells. A good example is the terrible devastation and loss of human life caused by the Japanese earthquake and tsunami on 11 March 2011. Allan Gray clients invested in our Balanced and Stable Funds were exposed to some Japanese shares through these funds' offshore holdings and, at the time, a newspaper headline shouted 'Allan Gray takes a whack on Japan'. Indeed, the Japanese stock market did drop significantly in the aftermath of the disaster.
In these types of scenarios, knee-jerk reactions are common, with investors selling in haste to avoid further losses. It is human nature to worry about the impact of a specific event on future investment returns. The fact of the matter is that these reactions are usually ill-considered and too late to be of any short-term benefit. The Japanese stock market recovered quite quickly from its sharp decline, and the temporary 'blip' had no long-lasting effect on the performance of our funds.
4. Compelling stories
Investors often make investment decisions based solely on a story, with little consideration for the actual valuation. In Quarterly Commentary 4, 2011, Andrew Lapping wrote that 'it is the price you pay that counts, not the headlines'. It is important to look beyond the story to assess if there truly is opportunity.
There are many shares in our local market that have very good stories to tell. Shoprite is one of them, with strong South African results, a successful African expansion and potential for growth. While Shoprite is an excellent company, we believe the premium being paid for its growth is simply too high. As Duncan Artus detailed in Quarterly Commentary 4, 2012, the amazing rise in its share price has been driven by investors willing to pay even more for the forecast earnings of Shoprite.
Click here to view an extended version of our new commercial.
While the winners on the day may continue to rise in price, and there is certainly money to be made by those who are lucky enough to time the market correctly, we believe that paying a premium seldom pays off. These stories can be a great distraction when looking for long-term opportunities.
Staying focused in investing is more difficult than most people realise
While these examples could all be powerful investment themes, more often than not, what people like to talk about most is not that important when making long-term investment decisions. It is very easy to be distracted from a proven philosophy and to be tempted into solving a shortterm crisis with a reactive response.
We do not know what the future holds, but we do know that there will be times when there will be weighty opinions that differ from ours, and that our investment returns may be very different than the market. Our new campaign is a commitment that we won't be distracted by trends, hype or popular opinion and we will stick to our tried and tested investment philosophy.