In a couple of past writings, I covered what I continue to believe is a fascinating phenomenon – the impact psychology and human behaviour have on financial markets. We have an institutional working relationship with Mawer Investments based out of Calgary. They wrote a great piece entitled “Worth the wait: crocodile investing” and I’ve quoted a few paragraphs below, the last referencing the millions of years of brain conditioning resulting in our evolutionary biases. Have a look:
“A young wildebeest steps into the Mara River unaware of the danger lurking just below the surface. Suddenly, the water splits, a flash of greyish green—and 15 feet of muscle surges forward, dragging the unsuspecting victim into the water.
After months of not eating, the crocodile’s patience pays off in a split second. While other predators must hunt daily to survive, the crocodile’s incredibly slow metabolism allows it to conserve energy for months (even years!) until it finds an opportune moment to strike.
Long-term investors can embrace a similar approach to great effect. For example, an investor may believe that a company has an excellent business model and is run by strong leaders, but finds its stock valuation too expensive. Using a crocodile investment approach, the investor can wait patiently for a better risk-reward proposition to emerge and, instead of allocating capital at an unattractive price, opt to act when the odds of success are strongly in the investor’s favour.
Those who successfully apply this investment approach tend to have a competitive advantage over their peers. Good crocodile investors can take advantage of fear in the market and allocate a large amount of capital at good value. They can wait during periods of investor frenzy when the price for a coveted asset is bid up too high.
While a crocodile investment strategy makes a lot of sense in theory, it can be difficult to implement in practice. Crocodiles have evolved over thousands of years to be patient, but humans have not. In fact, many investors’ relationships with risk are exactly opposite to that of the crocodile: acting aggressively when the perceived risk is low but the actual risk is high, and failing to act when opportunities present themselves because their perception of risk is distorted. Unfortunately, it is our own conditioned responses—millions of years in the making—that pose the greatest hurdle to successfully adopting this strategy.”
Have a wonderful weekend.
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Daniel Popescu CFP, CIM, FMA, FCSI
President & CEO
MNP Tower, 3100-1021 West Hastings St.
Vancouver, BC V6E 0C3
T: 604-558-6830/1(877) 588-6822
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