| Sam Volkering | 30 April 2020 |
You must be better than human nature
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| | Dear Subscriber,
I was reading an essay from Southbank Research Investment analyst Kit Winder yesterday.
In his essay he was describing his run through the street of London, getting in his daily exercise:
As you run along, you see couples walking side by side. As one oncoming runner approaches, they sidle over to the side and into single file, out of an unusual combination of politeness and terror.
Thirty yards ahead of me, this happened with a couple facing away from me. As soon as the oncoming runner had passed, they reverted to the centre ground and they wouldn't have been out of place in the queue for Noah's Ark.
I thought, as I stumbled into the road to get around them, that it was curious that people will make no connection between the oncoming runner and the possibility of runners coming from behind.
If single file and keeping to the side are the sensible option for avoiding people, why only do it when you have a visible threat?
It's embedded in human nature, isn't it? We are perfectly happy to deal with the threats we can see, but not particularly good at preparing when we can't see something going wrong.
It describes investors perfectly. Our number one weakness is not selling when the coast is clear, and not buying when everything looks terrible.
Because it's human nature to act on what you can see, rather than what you can't see.
Kit's description of human nature struck a tone with me. Coincidentally I also happened to stumble over a video online from a well-known person in sport back in Australia.
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What makes the greats, great?
The person was describing an encounter they'd had with a famous Aussie Rules football coach back in the day.
They were trying to figure out how to spot the best talent to bring into the club. Hence they decided to ask the coach, one of the all-time greats, a simple question.
The question was, "What makes the great players great?"
After some deep consideration, it struck. And the answer came with great significance.
| The great players are better than human nature.
| | There it was again, human nature.
We all are victims of human nature. It's hard not to be. Human nature regularly drives us to making decisions in day-to-day life.
But sometimes it's human nature that causes us to make the wrong decisions. It leads us astray from what is good for us, what can elevate us, what can make us one of the great players.
The ability to make decisions that perhaps step outside of the remits of human nature is what makes great players and what makes great investors.
And when I think about it, it's 100% true. The great players are able to put themselves in positions that "mere mortals" wouldn't consider, let alone do. But the greats know that's where the ball will be, and that's where they will stand the best chance of making that huge play, kicking that winning goal, and preparing to take the risk that others won't in order to win the game.
That's not to say they're reckless or make these decisions just because it's expected. They exist outside the realms of human nature when it counts, when it's time to make the big play.
And I'm of the view that for investors right now it is the time to exist outside the forces of human nature. Now is the time to make the big play. Now is the time to become one of the greats.
Where and what to do?
Like I say, that means decisions need to made. And it means you might be needing to put on your big person pants (or trousers if you're British) and making some calls that exist outside of your human nature instinct.
First, that means looking at the industries which are primed for a boom.
Yesterday I mentioned a couple of areas that might see a pullback as we come out of lockdown. But then there's a few areas that could boom as we return to a functional society.
My colleague Nick Hubble describes it as an X-rated recovery. Meaning some stocks will rise from all this and some will continue to plummet.
He's right, but it could very well be a K-recovery, some fail altogether as well.
Or maybe if you're a Wingdings font fan it could be a f recovery…
The point is I think it's a stock-pickers market. And that's exactly the kind of market we thrive in.
I think the "lockdown losers" are the first place to start a search when looking for the real bounce-back opportunities.
These "losers" aren't really losers. It's just when the government says you're all forced to stay at home and you must shut your business… they're going to struggle.
That means hospitality and food and beverage companies. That means hotels, travel and tourism. It means the right kind of airlines.
[Editor's note: airlines are crazy risky, as British Airways noted this week when announcing 12,000 redundancies were in order. It also made a point of saying it could be years until demands returns.]
It also means outdoor events, entertainment, transport and automotive are all areas that have been punished as "lockdown losers". Retail as well, but like airlines, you've got to be incredibly careful here as there's no doubt the death of the high street is still going to kick around after this.
That opens up your window of investments to hundreds of companies. Companies like Stock Spirits Group (LSE:STCK), Science in Sport (LSE:SIS), Loungers (LSE:LGRS), City Pub Group (LSE:CPC), Vertu Motors (LSE:VTU), Franchise Brands (LSE:FRAN)…
There's plenty more in these sectors that are worth a look at. Many have been punished, some have already bounced back. Some are still languishing.
You need to check out their state of play. You need to be assured of their liquidity, their debt obligations, their ability to continue to function in this lockdown period, and also assess their risks and potential to come out the other side.
These are the kinds of companies I'm looking at and researching. These are the opportunities, the kinds of stocks that fly in the face of human nature. Most investors will be too petrified to look at these kinds of stocks as opportunities. That's what human nature dictates.
However, if you know how to assess these stocks, how to understand the risks and know which are the right ones to make those "better than human nature" decisions on, then maybe you too stand a chance at stockmarket greatness.
Regards,
Sam Volkering
Editor, Southbank Investment Research
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