How to fold a fitted sheet...

This week’s update comes from the client services team.

I hope that you’ve had a lovely long weekend and enjoy another short week. I am currently in the middle of reading an excellent book by a chap called Tom Phillips titled “Humans: A Brief History of How We Messed It All Up”. Actually, I am paraphrasing; his terminology is much less polite but felt somewhat inappropriate for a Tuesday investment update (true as it may be).

There are many insightful and hilarious chapters in the book with titles like, “Super Happy Fun Colonialism Party” and “A Dummies and/or Current President’s Guide to Diplomacy”, however my personal favourite - mainly for its relevance to investing - is “Why Your Brain is an Idiot”. Now I am, of course, not implying that readers of this email are idiots, but I do want to remind investors (myself included) of how the natural behaviours and tendencies of our species can work against our success and, in investment terms, our ability to make money. There is a key point that I would like to highlight for the purposes of this note:

The power of the media and availability bias

Philips draws attention to how impactful sensational news stories can be on the human brain. And, importantly, that the impact is disproportionate – less “interesting” stories carry much less weight. This is easily illustrated by the common fear of plane crashes, which is regularly exacerbated by front page headlines and great deal of media space. This fear is in spite of the fact that, as most of us already know, plane crash fatalities are much, much less common than road traffic equivalents (which get significantly less air time).

To quantify this, in 2009, 50 people in the US were killed by plane crashes compared to over 33,000 in traffic accidents (cnbc.com and crashstats.nhtsa.dot.gov).

For reference, in the same year, 717 people died by becoming tangled in their bed sheets (tylervigen.com)…. the mind boggles as to how so many people manage to do this!

The knock on effect of this is that we are then prone to making decisions based on this more sensational information - we often make judgement calls based on the information that comes to mind most easily. Philips notes that we’re hugely biased to basing our world view on things that happened most recently, or things that are particularly dramatic or memorable. The old, mundane stuff tends to fade away…


('How to fold a fitted sheet' source: www.sunnyskyz.com)

When it comes to investments, the same can apply. Would you be more drawn to read or remember a news story about a wildly exciting company whose bosses rub shoulders with sports stars, A-list celebrities and politicians and which is about to list its shares in what is eagerly anticipated as a once-in-a-lifetime-opportunity? This is the stuff of dinner party fodder and sensationalist media headlines may even prompt people that have never invested to make a foray into financial markets for fear of missing out (I’m looking at you here bitcoin!). Or would you be drawn to a small, less obvious headline about how a familiar household name that listed on the stock exchange 40 years ago sold a bit more soap this quarter than last. And, importantly, which company would you be more interested in buying? I’m sure we’d all like to think we are in control of what influence the media has on our lives but sadly I would suggest that in today’s 24/7 media, we don’t have quite as firm a grip on the steering wheel.

Sometimes those older, more mundane companies are actually still great investments; particularly if you intend to hold them for the long term.

While glitzy new offerings may well also provide great investment returns, it’s important to ensure that you are basing the investment rationale on the right information and not being biased by what the media is telling us.

After all, their aim is to generate clicks and sell papers, not help you to retire three years earlier.

In fact we could probably test Phillips’ assertion that mundane stuff tends to fade away. I wonder whether any readers will remember anything from this article other than how many people were killed by their bedsheets….

Have a great week!