by Orbis
When it comes to trying to maximise their share of your spend, retail businesses have long understood that behavioural biases are important influences in what and how much you end up buying.
Recognising that many of us will buy much more of a product at a slightly lower price, and that deep down we’re seeking to conform and look for trending items, our biases come with us every time we go shopping and play a major part in dictating what ends up in our trolleys.
Decision making in financial markets is no different. Time and time again, we see investors getting carried away with popular opinion, only focusing on information which backs up their current view and making assumptions about the future as if the current situation will never change. And these are just a few of the biases that are at work.
At the extremes, these biases can lead to asset price bubbles, such as the tech stock boom, or the recent surge in cryptocurrency prices, such as Dogecoin, but they’re always here. And the presence of these biases is what can make a contrarian investment approach effective.
Let’s take B&M as an example. B&M is a discount grocery and homeware chain based in the UK. Its stores sell everything from baked beans to toys to garden furniture. It has a fantastic track record of profitable growth stretching back several decades.
Its low-cost offering has resonated with consumers across the country, allowing it to open several hundred new stores over the past decade and still have plenty of further expansion potential ahead.
With a strong business model, steady profit margins and a solid long-term outlook, you might think that B&M’s share price would be relatively stable and grow in line with the business. However, the reality of the past few years shows something quite different.
As we can see, the share price is far more volatile than the progress of the underlying business. And this is driven by investor biases often exacerbated by short-term thinking.
For example, in the days following the Brexit result in 2016, more and more investors rushed for the exits. Worried that departure from the EU would permanently hinder the progress of the UK economy, they sold out of retailers indiscriminately—typical herding behaviour. B&M shares were caught up in this sell off, but the herd sellers were ignoring the business’s fundamentals—a retailer whose offering is centred on value for money and whose supply chain dependence on Europe is low.
“As in 2016, many of the sellers were ignoring the excellent long-term fundamentals of B&M’s business and this was despite B&M stores remaining open throughout all lockdowns.”
And when Covid-19 hit in early 2020, it would have been easy to think that life would never return to normal and that lockdowns would somehow be a permanent problem for a business with no online offer. While perhaps understandable, the conviction that this new normal will continue into the future is a good example of recency bias.
As in 2016, many of the sellers were ignoring the excellent long-term fundamentals of B&M’s business and this was despite B&M stores remaining open throughout all lockdowns.
At Orbis, we can’t pretend to be impervious to bias, but like the shopper who always uses a list, doesn’t go shopping when they’re hungry, and patiently waits for their desired items to be in the sales, we can put in place structures to help. These structures can both help to mitigate the downsides of bias and also allow us to benefit when the market is looking particularly biased, giving us opportunities to buy investments for much less than they’re really worth.
Conscious that we have to think and act differently to deliver great investment returns over the long term, we have found that these psychological traps are more easily avoided by considering long periods of history and always looking at least five to 10 years in the future when making investment decisions. For a retail business, it’s also important to spend a lot of time in their stores and those of their competitors to really understand the customer perspective.
As mindful as we are of these biases, we still need all the help we can get to overcome them, and potentially use them to our advantage. That’s why we structured our firm to take the same long-term perspective that we use with our investments: we’re owned by a philanthropic foundation into perpetuity and we have a culture that explicitly acknowledges that great investment returns necessarily come with short-term volatility.
But then again, we don’t always get it right and it can be uncomfortable. But over the last 30 years, this approach has helped us to think and act differently. Which is something I think we should be proud of. Then again, maybe I’m a little biased.
Past performance is not a reliable indicator of future results. The value of investments in the Orbis Funds may fall as well as rise and you may get back less than you originally invested. It is therefore important that you understand the risks involved before investing. This report represents Orbis’ view at a point in time and provides reasoning or rationale on why we bought or sold a particular security for the Orbis Funds. We may take the opposite view/position from that stated in this report. This is because our view may change as facts or circumstances change. This report constitutes general advice only and not personal financial product, tax, legal, or investment advice, and does not take into account the specific investment objectives, financial situation or individual needs of any particular person. This report does not prohibit the Orbis Funds from dealing in the securities before or after the report is published.
Additional notes for Australian clients: Equity Trustees Ltd AFSL No. 240975 (EQT) is the issuer of units in the Orbis Funds domiciled in Australia. You should consider such funds’ Product Disclosure Statement (PDS) or Information Memorandum (IM), as applicable, before acquiring or disposing units in such funds’. The PDS or IM can be obtained from www.orbis.com.au.
Target Market Determinations (TMDs) for the Orbis Funds can be found on our ‘Forms’ page under ‘How to Invest’. Each TMD sets out who an investment in the relevant Fund might be appropriate for and the circumstances that trigger a review of the TMD
