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Focus on the facts

11 October 2019

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by Tamzin Nel, Portfolio Management

I am tired as an investor. I am tired as an individual. I know that I am not alone. On the investment side, Darryl Hannington, Anchor’s head of portfolio management, spoke to equity fatigue and the various options available to investors in his article entitled, Invest(ing) in the other 99% published in the 3Q19 Navigator. Obviously, all the facts, figures and suggestions he made, makes sense. However, sometimes, as human beings, we might not necessarily.

In my previous article for the Navigator entitled Three money memories, I spoke about how financial behaviour tends to be more emotional than rational and that our financial behaviour, as with the rest of our actions, is a deep-rooted expression of our internal psychology.

The problem, though, is that, as human beings, there are numerous behavioural biases which impede our ability to reason if we don’t understand these inclinations and make a conscious effort to work around them. In this note, I want to talk about one of the options available to us as individuals to manage our mental health and, as a consequence, our financial health.

We are tired because we are constantly being bombarded by a seemingly never- ending stream of negative news. And, unfortunately, we are hard-wired on an evolutionary level to focus more on the bad news than (admittedly, the harder-to-find) good news. This is a psychological phenomenon known as the negativity bias.

A couple of years ago, I read a book by Rick Hanson, a neuroscientist and psychologist, called Buddha’s Brain. In this book, he simply explains our focus on negativity. Our ancestors needed to be alert to danger because it was a matter of life or death for them. We inherited these genes and, as such, we are inherently negative. In addition, not only does our brain’s “alarm bell” use more capacity (two-thirds) to look for bad news, but this bad news imprints far more quickly and lingers longer in our memory (in contrast to positive events and experiences, which are usually only held in our consciousness for a dozen or so seconds). There is positive-negative asymmetry.

Thanks to evolution, our biological and chemical make-up, we register and recall the negative over the positive. Did you really have a bad day, or did you only have a bad ten to twenty minutes during the day? Have you found yourself fixating on past mistakes or insults but rarely take note of your achievements or the compliments which you receive? Does it cause you more pain to lose money than the pleasure of gaining an equivalent amount?

This last one is an example of another behavioural bias called loss aversion as explained by prospect theory and explored in detail in the book Thinking, Fast and Slow and other works by Daniel Kahneman, a Nobel prize-winning economist. Kahneman did extensive research and writing in applying psychological insights to economic theory, especially with regards to making judgements and decision making.

So, not only are we subjected to bad news more regularly and easily, we also tend to focus on this more. Unfortunately, we cannot do much about the way in which news is reported since sensationalism sells. However, what we can do, is change the news that we actively seek out, and our subsequent interpretation thereof.

One of the best gifts I received last Christmas was a book (books always make for the best gifts). Unfortunately, I only started reading it recently. Although, in retrospect, maybe I started reading it at exactly the right time. I am an inherently positive person, but the past few months I have felt myself being weighed down by negativity.

“It is easy to be aware of all the bad things happening in the world. It’s harder to know about the good things; billions of improvements that are never reported.”

The book I received and I am reading, which I think every single individual, and investor should read, is called Factfulness by Hans Rosling. This (Factfulness) is the one option available to all of us as individuals to manage our own mental and financial health. Factfulness is the stress-reducing habit of only carrying opinions for which you have strong supporting facts.

As a working example from the very document that you are reading, I would highlight Peter Armitage’s contribution to the Navigator entitled, SA’s corporate meltdown: Billions of rand vaporised. You could read just the title and assume the worst, or you could delve deeper into the details of the piece and understand the facts being explained. As he writes in his opening paragraph: “The temptation is to jump to the conclusion that SA business is fraught with malfeasance, but this analysis seeks to illustrate that, while there has no doubt been unethical behaviour, the majority of failures have been through a combination of bad luck, tough market conditions, one-off unanticipated events and poor judgement.” Similarly, Glen Baker’s contribution, SA Property: Light at the end of the tunnel? demonstrates that, even though the property sector is not immune to economic conditions, there may well be a structural change in the way investors value property and SA-listed property is now trending towards an equity-like profile, which is in-line with property sectors across US, European and Asian markets.

In addition, as he explains, there are some mitigating fundamentals being ignored which present valuations that make for a compelling investment case. Both of these articles should be read in their entirety for the whole message to be properly understood and this also applies to almost any information we consume, albeit research, news, books etc. Of course, there are articles and news reports which are not even based on facts so it’s always important to curate what you consume and not only how you consume it.

The sub-heading of Factfulness is Ten reasons we’re wrong about the world – and why things are better than you think. Hans and his collaborators, Ola Rosling and Anna Rosling Rönnlund, offer a radical new explanation of why we are wrong about the world and why it is better than we think. They reveal ten instincts that distort our perspective and how to overcome these behavioural biases. His second reason, and Chapter Two explains the negativity bias, “our tendency to notice the bad more than the good”, as referred to earlier. There are numerous examples and stories and, most importantly, facts. In summary, we are negative because we misremember the past, are exposed to selective reporting by journalists and activists and a part of us feels heartless to say that things are getting better when some things are still bad (even if they are improving).

It is easy to be aware of all the bad things happening in the world. It’s harder to know about the good things.

On page 7 in the first few paragraphs of our Strategy and Asset Allocation section, we speak to the latter – we acknowledge that, even given the work that needs to be done locally and globally, we are pleased to see that the direction of change is improving. We need to recognise when we get negative news and remember that bad news is far more likely to reach us, and stay with us, than good news. Nick Dennis’s article entitled, Investing in uncertain times: What would Peter do? speaks to this wisdom and Nick quotes Peter Lynch who echoes this sentiment throughout. He summarises by noting that often we are our own biggest hurdle due to all the (usually negative) noise, but highlights that if we focus on companies (the facts) and maintain an optimistic outlook we will reach “nirvana”.

The world is constantly changing, and it is important for us as investors and individuals to update our knowledge and worldview accordingly. In my previous article for the Navigator, I wrote that financial integrity encompasses understanding why you manage money in the way that you do and if you are feeling competent to either continue in that manner, or to make the necessary changes. In this article, I want to encourage you to understand the type of information you are consuming and to make sure that you are making your decisions based on FACTS and not on your primordial negativity instinct. If you are not, make the necessary changes or allow us to assist you. Seeking out positive facts and factual news will not only improve your mental health but, as a result, your financial health as well.

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