On Following Instincts – and Crowds
I’m a believer in managing expectations, but I’ve found there are few better ways to undermine your potential travel enjoyment and investment success than limiting yourself with preconceived notions.
That being said, I myself have fallen victim to (wrongful) assumptions or biases. When my team and I traveled to the Republic of Botswana recently, I was, to be honest, expecting dilapidated infrastructure and generally depressed conditions as can be seen in some of the Sub-Saharan African countries. The actual experience, however, was quite surprising. When we landed in the capital, Gaborone, we found that the airport was recently remodeled, with a full commitment to creating a pleasant, efficient and overall positive experience for arriving travelers.
It set the tone for other pleasant surprises we found there—including unexpected opportunities in new industries there to further investigate. In addition to a new modern and efficient airport, we saw lots of construction of new offices and apartment buildings, good roads, and we perceived a generally bright outlook there.
As one of the world’s largest diamond exporters, mining has been a key driver of Botswana’s economy. Since gaining independence in 1966, Botswana managed to transform itself from one of the world’s poorest countries to a country with one of the world’s fastest growth rates, and with that, a growing middle class. The International Monetary Fund projects Botswana’s 2013 GDP growth at 4.1%.1
With one of Africa’s more stable and progressive regimes, Botswana has a diverse global base for its exports and notwithstanding some social problems, is truly an African success story, in our view. We discovered how leaders have been diversifying the economy via tourism and initiatives such as the introduction of call and data processing centers.
The purpose of our trip was to visit a company that, on paper, looked attractive as a potential investment. The management delivered an impressive presentation, talking up their products with verve. But later, in a local supermarket, I noticed the company’s goods were resigned to the farthest corners of the shop where they were difficult for customers to find. This raised some red flags for us to probe more deeply into the company’s growth potential. The whole experience was a good reminder that sometimes, you have to not only see things yourself, but you have to dig beyond the surface of what others are telling you.
After our first visit to Botswana, we felt the country looked to be a good place for growth and potential investment, but perhaps not so the individual company we had originally come to examine. It confirmed the reason why I travel so much: investing intuition plus first-hand observation and analysis is a powerful combination.
Another case in point. When I’m in a country and don’t at least once find myself in a traffic jam, it makes me suspicious about its growth potential. Why? When an economy is booming, congestion often results because infrastructure can’t keep up fast enough with the growth. The number of trucks on the roads can also be an important indicator of the demand for goods and services flowing in and out of a country.
Sometimes, when there’s too much traffic clogging up the road you need to take a different route. Following the same path as everyone else can stall your progress in reaching your investment goals too. Templeton’s founder, the late Sir John Templeton, was a proponent of not following the crowd. One of his more famous contrarian quotes is, “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”
In the realm of behavioral finance, following the crowd is termed “herding.” Many of us are conditioned to believe that the collective wisdom of the masses is superior to our own individual ideas, but this herd mentality can prevent us from reaching our investment goals. Sometimes, you just need to trust your own intuition. Here’s a good video on the topic I thought I’d share that illustrates in a fun way the pitfalls of following the crowd.
U.S. investors can view the video here
Non-U.S. investors can view the video here
The lesson of all this as investors is what my team and I continually strive to do — keep an open mind, trust your intuition, and try to avoid following crowds, both on the streets and in the equity markets!
1. Source: Copyright © by International Monetary Fund. “World Economic Outlook” October 2012.