Ryan Bushell

During the aftermath of the tragic disappearance of Malaysia Flight 370 I read an excellent Opt-Ed written by Dan Gardiner for The Globe and Mail which you can read for yourself here

The article detailed research on split brain patients by Michael Gazzaniga and others which you can learn more about here

Basically the premise of the article was that the left side of the human brain contains an interpretation function that urges us to seemingly find logical answers for mysterious or uncertain events.  In The Globe and Mail article, the author details a study by renowned neuroscientist Michael Gazzaniga, where the patient’s right brain is shown two related images: a snow storm and a snow shovel.  The patient’s left brain is then exclusively shown a picture of a chicken claw and is asked why they are pointing to the shovel.  In the study the left brain’s interpretation function comes up with an elaborate answer about cleaning the chicken coop out with a shovel that had no basis in fact.   It was simply the best the left brain could do in a situation where the patient was unsure why they were pointing at the shovel in the first place and the two sides of the brain could not communicate the real answer.

In the aftermath of the Malaysia Flight 370 disappearance many “expert” theories abounded about the reasons the plane vanished and its predicted whereabouts, but there was very little hard knowledge behind any of the “news”.  The author of the article used the chicken claw/snow shovel example to show how it is natural for human beings to hypothesize about the reasons for uncertain events, citing an almost non-discretionary desire to make sense of the world.  This is a characteristic that has benefitted our species since inception; however we must also realize that it has its drawbacks.  In this case specifically, it is now more than 4 months since the disappearance of Malaysia Flight 370 and we still don’t have a firm answer on its final whereabouts or the reasons for the disappearance.

I had filed this particular story away because of its implications for investing, hoping to write an interesting post following the discovery of the plane.  I figured the plane would be found in a logical location that was missed for logical reasons and I could make a solid case about the facts revealing themselves in time, but it’s actually more poignant that the plane has yet to be discovered.  The investing future is always uncertain.  At any given point in time there are logical reasons for any index, commodity, or stock price to go up or down.  Predicting that future precisely at either the micro (single company) or macro (global economy) level  is an almost impossible task that many otherwise competent, rational people willingly take on daily, even though the majority of academic research deems this type of predictive activity extremely inaccurate.

In our most recent Leon Frazer Quarterly Review and Leon Frazer Market Perspectives  we challenged the notion of tactical investing or “market timing”, noting that the human brain prefers action when faced with uncertainty because it provides the illusion of confidence and control.  When I read this article I noticed that it’s actually deeper than that.  Our physical wiring predisposes us to make up evidence in the face of uncertainty to justify the actions we take.  The prospect of not knowing and not doing anything is more painful for the human brain than the risk of making a mistake.  When you factor in the element of ego that many professional and amateur investors have, and connect that with the natural instincts wired into the brain, it becomes easier to understand how the same mistakes are repeated in the stock market over and over again.  In short being a good long term investor often runs contrary to our innate human nature.

At Leon Frazer we have never ascribed to the tactical “Buy low, sell high” strategy that many lay people believe is the tactical secret to the stock market.  This adage is a gross oversimplification and can be largely attributed to the brokerage industry that gets paid commission when you buy or sell and not necessarily on the results of these decisions over time.  Instead, our approach could better be described as “buy quality companies, harvest and re-invest the dividends in similar companies, and sell only when you need the money or when you find a company that is of better quality”.  Not quite as catchy, I must admit, but much more effective and realistic over the long term.

Investors are often tricked by the “market magician” who claims to be able to put them into the market or a stock when the sun is shining and get them out before the storm.  Much like the millions of people around the world who tuned in daily in an attempt to learn the whereabouts of Flight 370 believing the stories of terrorist hijacking or pilot suicide, investors are tricked into a logical sounding solution because they so badly want to know the answer.  The hard truth is that we still do not know why Flight 370 disappeared and we also can never be certain on the near term path for the stock market.

Fortunately for us as investors we know 2 things to be true: First the market increases in value over longer periods of time, and second that if you remain invested in quality dividend paying companies, you earn an ongoing cash return on your investment whether the market is up, down, or sideways in the near term.

The article closes by speaking about how the best plane crash investigators do not cave to their ingrained predisposition to jump to conclusions, instead waiting for facts to surface even if it takes months or years.  They know it’s natural to have hypotheses but they have the discipline to harness this emotional response and make reasoned judgments in the fullness of time.  I couldn’t help but think of George Frazer when I read this article who applied similar discipline and reason to investing.  George often would procrastinate when making investment decisions, especially late in his career, knowing it took time for the right conditions to line up to buy or sell a stock at a desirable level.  That patience was often rewarded.   A self-aware man who’s ego was a distant second to his desire to earn returns for clients, George would often proclaim “I haven’t the faintest idea where the market is going”.  Judging by the chart below depicting how a $10,000 investment would have done in the IA Clarington Canadian Conservative Equity Fund* since its inception in 1950, maybe that attitude was for the best.

Value of $10,000 invested since inception in 1950

Value of $10,000 invested since inception in 1950

* As at June 30, 2014: The original $10,000 investment is now worth $3,251,195.94 of which $1,087,987.11 represents reinvested dividends

* Leon Frazer and Associates has managed the IA Clarington Conservative Equity Fund since its inception in 1950.  Geoge Frazer was the lead manager from inception until the middle of the last decade when the management was transitioned to the Leon Frazer Investment Team led by Chief Investment Officer Doug Kee

 

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