Not only is there an evolutionary impulse to follow the crowd, in investing at least there’s also a pay off: you may not achieve extraordinary returns but nor will you suffer extraordinary embarrassment.
Myer is one recommendation that could have caused us significant embarrassment but is so far delivering on its promise. The fact that we were prepared to accept that possibility and recommend the stock anyway is a good example of what value investing really entails.
Without a herd mentality, value investing would not produce the range of opportunities it does. But because falling share prices frequently lead to panic selling, stocks can become far cheaper than they’re actually worth. Conversely, investors will often jump in and buy stock in a company enjoying a share price spike.
More rationally-minded investors should welcome this counter-intuitive behaviour, especially if they have the fortitude to ignore popularity and go against, rather than follow, the crowd. Myer’s (ASX:MYR) recent history shows why.
In an era of booming online shopping and growing competition from speciality fashion retailers, arriving at a negative view of department stores was as natural as putting one foot in front of the other.
Myer’s 2009 IPO featured a prospectus that looked more like a fashion catalogue. The float itself was a disaster. The company’s share price fell from an issue price of $4.10 to a historical low of 83 cents in October 2015. This was a competitive industry in structural decline, or so everyone thought.
When we put it on our Buy List on November 2015, Myer was the second most shorted stock on the ASX — a title it still had as recently as May 12th. In essence, we were asking members to take a view that many large, professional investors vehemently opposed.
Despite the fact that Myer’s share price has risen around 30% since then, it remains on our Buy List, just. Of course, it’s early days. Six months is too short a period to call this a success. Myer remains a company with a business risk weighting of ‘very high’ and much could still go wrong. It remains a speculative opportunity.
Nevertheless, this short history does reveal something about the relationship between opportunity and negativity.
Rather than see a grotesque corpse masquerading as a department store, as did the rest of the market, we saw in Myer a company that was being offered at Boxing Day sale prices. Not only was it cheap, new management had a common-sense turnaround strategy.
The analysis was the easy part. Far harder was departing from the generally held view that Myer was a basket case, going out on a limb to make a call that no one else was prepared to make. It’s an uncomfortable place, and one that had – and still has – the potential to make us look pretty foolish if the range of possible outcomes falls against us.
James Greenhalgh, the analyst on this stock, took that risk because he knows something that all successful value investors know: buying unloved and cheap companies with share prices at all-time lows is a far more successful strategy than buying them at historical highs. But you can’t do that without going against the crowd.
This understanding has a second level of complication: sometimes the crowd is right, and it’s this nagging doubt that can stop us from acting when the facts suggest we should. When Ben Graham, the father of value investing spoke of ‘independent thinking’ this is what he meant – the victory of reason, facts and analysis over impulsivity and emotion.
If you can win that battle then you have the makings of a great investor.
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