This year’s Livewire Live wrapped up last night, and as with the previous three events, there were some amazing insights and lessons for all investors, regardless of experience. All the presenters and panellists had interesting things to say, but for me, there were two standouts. The first of these I expected to be impressive, and it did not disappoint. I didn’t know what to expect from the second one, but I was impressed by the insights and how entertaining the content was. The former was by Steve Johnson from Forager Funds, the latter was by Chris Bedingfield from Quay Global Investors
Taking advantage of investor psychology
We’re all looking for an ‘edge’ in investing. You can’t make outsized returns by doing the same thing as everyone else, so you need to do something different (and better) than others.
Steve Johnson, founder and Chief Investment Officer of Forager Funds freely admits what they can’t do better than others – they don’t have a huge research team or an informational edge, nor are they the smartest guys in the market. What they can do is take advantage of other investors’ irrational behaviour.
“Why do we look at stocks that are down 80% over the last 12 months? You might as well look at stocks that have doubled. My answer is that people hate losing money. So, when their stock is down 80%, they will sometimes do irrational things.”
In the television program 'Billions', Wendy Rhodes is a psychologist who works for a hedge fund in the US. While Forager doesn’t have a resident psychologist in the office, they do try to apply some of her principles when they’re investing. Some of the things he does well include unemotional thinking, probabilistic thinking, and a lack of loss aversion. He admits that some of the biases he suffers from are anchoring, commitment bias, and the ‘need to act’ bias.
“I went to the Berkshire Hathaway meeting in 2006 and I felt decidedly uncomfortable. There were 30,000 people in the crowd pretending that they don’t follow the crowd.”
Steve says the most common bias that he observes in markets is narrative bias.
“Human beings are wired to like hearing stories and explanations more than they like analysing the facts… How do you know if you’re suffering from the narrative bias? If you can make the same argument at any price, you might be suffering from narrative bias.”
He shared the example of Photon Group, now called Enero Group. Photon was a highly successful stock in the pre-GFC Australian market; a roll-up story for investors to get excited about it. Investors got excited about the story, which drove the price to dizzying highs.
But this is a story about Steve’s mistakes, not the market’s. Some years later, the stock price fell from $6 to $1. He says he made three mistakes: being anchored to the old share price, confirmation bias, and commitment bias. He decided he wanted to buy the stock because the price had fallen, he then sought out information that would support his position while ignoring information that would refute it. When stock price fell further though, they made a further mistake – buying more in order to be right.
Steve also shared two more examples in his presentation, so keep an eye out over the coming weeks for the video of the session for more details. In the meantime, here are five books Steve recommended in his talk, to keep you busy.
Five books on investor psychology
- The Psychology of Persuasion – Robert Cialdini
- Thinking Fast and Slow – Daniel Kahneman
- Superforecasting: The Art and Science of Prediction – Philip Tetlock and Dan Gardner
- The Signal and the Noise – Nate Silver
- The Psychology of Human Misjudgement – Charlie Munger
If you are interested in receiving the Forager monthly and quarterly reports, please register here.
What property investors can learn from... Monopoly
Monopoly, you ask? The board game?
It’s an unusual analogy, but it’s surprisingly insightful. Chris Bedingfield explains that in Monopoly, the best squares to own are the orange ones.
Firstly, the orange squares are among the most landed-on squares in the game. This is because of the Jail, which is the most landed-on square. With two dice, the most likely numbers to roll are 5, 6, 7, 8, and 9. These numbers put you squarely (excuse the pun) on the orange squares. In property, this is equivalent of buying demographics – the statistical likelihood that someone will need your real estate, regardless of desire.
Secondly, the orange squares are cheap compared to the others on a ‘price to earnings’ basis. In property, this is equivalent to buying value.
“There’s no point buying a narrative. There’s no point buying demographics, unless you buy value.”
Thirdly, the orange squares are great for ‘development’. When buying houses and hotels, the marginal return on capital for the orange squares is greater than anywhere else on the board.
By way of example, Chris makes the case for Scentre Group (ASX:SCG).
Australia has positive demographics, with population growth of around 1-2% p.a. This makes Australia the third fastest growing country (by population) among the G20 nations. So, it ticks the demographics box.
Within Australia, the top shopping centres are growing faster than the rest of the market, and Scentre Group owns eight of the top 10 shopping centres in Australia. Its development margins have averaged 58% since 2004, and there’s been no decline in these margins in recent years. So, it ticks the quality box.
While Scentre has traditionally traded at an average of about 1.2x book value, it’s currently trading below 1x book value. This is the biggest discount it’s been at since 2014. It’s also trading at a discount to the ASX200. So, it also ticks the value box.
“(Scentre Group has) a barrier to entry, a high quality business, and an economic moat.”
What about interest rates?
Popular opinion states that property prices move inversely to interest rates. But history shows that this is not always the case. In the last major hiking cycle in Australia (’03 - ’06), REITs actually appreciated at a similar rate to the ASX 200. It’s not just Australia either, the same was true in the US, and globally.
I have units in Forager, so I too know what to expect from Steve. Found Chris's comments enlightening. I guess I made the big mistake of assuming the Monopoly board was an efficient market and that all sites were equal on a risk reward basis. Though thinking back, the winner was more often than not the person who held more of the mid-price properties. It would be fascinating to know how the prices and rents were originally determined.
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