Investing like an elephant! Playing the long game…
If financial history teaches us anything, it’s that people don’t tend to have a long memory when it comes to markets. History is littered with asset bubbles, from tulips in the 17th century to sub-prime mortgages in the 21st. Asset bubbles are hallmarked by the same behaviour: euphoria and greed, followed by fear and loss. Yet collectively, investors can’t seem to avoid these behaviours which is why asset bubbles keep recurring.
Humans pride themselves on their intelligence relative to other animals. However, as we have a tendency to repeat past mistakes, it may be worth returning to the animal kingdom for guidance. The animal most famed for its memory is, of course, the elephant. They store away nuggets of knowledge that can be unearthed many years later – water sources, routes and places of safety. They know where predators lurk and modify their behaviour to avoid them.
In investing terms, the predators we face are uncertainty, volatility and, ultimately, loss. At the moment, we have the unpredictability surrounding Brexit and the US-China trade war is also causing anxiety. Both of these are exacerbated by the fear of a global slowdown.
When faced with uncertainty, people often seek comfort in a crowd. Though that can lead to groupthink, where investors follow an accepted wisdom, and drive unprofitable investment decisions. Just as likely as racing to get exposure to a ‘bubble stock’, this could result in being unduly pessimistic about a company or sector and selling at a disadvantageous time. Like the elephants, we need to learn from the past and use this knowledge to our advantage. That includes not being swept up in euphoria or fear.
The ability to stand apart from the crowd is central to our contrarian investment approach. We’re looking for the ‘ugly ducklings’ of the investment world – companies unloved by others, but which have the potential to transform and improve. Usually, this means identifying catalysts for change that the broader market has missed. These could include new management, a fresh business model, or being part of a merger or acquisition. Crucially, we don’t expect improvements in a company to happen overnight. Our investment decisions are made for the long-term and we have patience to wait for stocks to transform from ugly ducklings into swans.
The benefits of the Trust
Over the long-term, equities on average have produced superior returns to assets such as bonds and cash. While market volatility undeniably creates anxiety, it can also present interesting investment opportunities for the contrarian investor.
Today more than ever, there is a great deal of choice available to people who wish to invest in equities. For ISA investors who are looking to the long-term – whether that’s saving for a child’s school or university fees or securing a nest egg for the future – a fund with a contrarian approach could be a useful component of a diversified portfolio.
Operating since 1887, the Trust is structured as a closed-ended vehicle which promotes long-term decision making. We’re also mindful of costs and therefore the The Scottish has one of the lowest ongoing charges figures in the AIC Global sector (source: Numis Securities).
Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.
Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.