Behavioural Edge

Clients frequently inquire what our edge is, in a competitive marketplace. Through years of experience we have realised that our real edge over peers is our behavioural edge. This behavioural edge manifests itself in many ways. Key to understanding this behavioural edge is how we avoid some typical biases which are inherent to many investors.

Let’s discuss three biases which are common among investors:

Many investors seek quick returns, focusing intensely on short-term results. This drives them to project the next few quarter numbers to the second decimal but they are not focused on the long-term business economics, as we are. We invest in high quality companies when they are trading at a discount to their intrinsic value. Sometimes it takes several years for them to move to their intrinsic value or a premium to it, to allow us to then sell the stock at a good profit. At the time, that the stock is trading at a discount to its intrinsic value, there is usually a lot of bad news about the company or the industry it belongs to. We’ve had clients from the same industry question our rationale for holding such stocks amid apparent headwinds. It then takes a lot of fortitude and the courage of conviction, to hold on to our view. Investing, as they say, is more about gut than brain.

This bias often emerges when the market has a lot of momentum, and ‘’stories’’ are spreading thick and fast among investors. At such times, it takes considerable fortitude to stay disciplined and even endure short-term underperformance, while staying focused on our established investment process.

Once a person invests in an idea, it is very hard to see the other side of the argument. One will often seek data which confirms with one’s view. To counter this, at Banyan Tree, we frequently play “devil’s advocate” among ourselves, ensuring we thoroughly examine all aspects of our investment thesis. Our investment process tries to ensure that we are looking at things as objectively as possible.

If you examine our historical performance, you will find that we often underperform or just keep pace during strong bullish markets. However, our true outperformance shines during bearish periods when the market is struggling. This is due to the hard choices that we make – like not going down the quality curve in a wildly bullish market. We know in these situations that lowering the quality of our investee companies may give us good short-term returns, but our razor-sharp focus on minimising risk keeps us out of these situations. We are more likely to invest in a company where there may be a short-term hiccup, but which we expect will do We prioritize sustainable, long-term returns over fleeting short-term gains.

Another way we distinguish ourselves from other investors is by truly walking the talk. While many claim to buy high-quality companies at bargain prices, the real question is, how many genuinely follow through? How many investors simply choose a convenient study period to justify their numbers? We believe our method for identifying high-quality businesses is exceptionally robust, refined, and honed over many years. We engage in extensive “scuttlebutt” research, gathering insights from customers, employees, and suppliers to validate our hypotheses. .

As Peter Lynch said “Ultimately it is not the stock market nor even the companies themselves that determine an investor’s fate. It is the investor.”