Simon is the Chief Executive Officer and Publisher at Wealth Morning. He has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge-fund industry in Europe. Before this, he owned an award-winning professional-services business and online-learning company in Auckland for 20 years.
There is nothing either good or bad, but thinking makes it so.’
Was this the most unusual degree combination? Commerce, majoring in finance and accounting. Literature, majoring in Shakespeare’s tragedies. I literally walked from lectures on balance sheet analysis to Romeo and Juliet.
Let me tell you, these subjects are more entwined than you may think. Shakespeare was one of the most astute observers of the human heart to ever put quill to paper. He was aware of the mental game that drives success or downfall.
When it comes to investing, it is this mental game that can lead to great profits or disappointing losses. I’ll give you an example with a stock we recently bought in just a moment.
Nothing Either Good or Bad, but Thinking Makes It So?
In Shakespeare’s play, the quote refers to Hamlet’s state of mind. He suffers because he’s consumed with negative judgment over what is happening around him.
This lesson runs even deeper today. Studies show people in Western countries get depressed by a series of negative judgments over daily irritations. As opposed to actual catastrophes, which are very rare.
Ongoing negative judgments wear down your mental health. And for investors, they can lead to investment mistakes you may regret.
One of the main causes for such routine judgments is a tendency to see everything as a binary choice. Either good or bad. When, in fact, the wider picture usually has aspects of both.
Response to 2020’S Biggest Event
The way people responded to this year’s most upsetting event demonstrates this.
Coronavirus lockdowns were either good because they saved lives. Or bad because they destroyed livelihoods. But they should not have been a binary choice between life and the economy. Both considerations needed to weigh. Some even suggest aggressive lockdowns over the long run could lead to as many deaths via suicide and depression as from the virus itself.
We saw this binary phenomenon again with the US presidential election. Many people seemed to vote because they loved or hated Trump. The rational investor would have weighed things up more objectively.
How? Well, like this.
On one side, an express desire to ‘drain the swamp’ led to some sweeping changes. We saw deregulation and tax cuts helping to drive the largest improvements in income and poverty for over 50 years. Black, Hispanic, and Asian Americans experienced the largest gains.
Indeed, before coronavirus, the economy and financial markets were booming. Generating record levels of prosperity and hope.
Then came the virus. The leadership failed to grasp the deadly spread across the States. Nor could it bear to see the economic gains eroded.
But a sensible investor would have put anger and passions to one side. And looked for the cleanest way through.
Biden may offer a more sympathetic response to coronavirus. And more agreeable foreign policy. But can he offer long-term economic renewal in this climate when his key plans involve tax increases? This remains to be seen.
Investing Involves Emotional Management
The best investors are able to put their fears, emotions, and personal prejudices aside. To focus on their desired outcomes. In doing so, they cash in on others’ fears.
Case in point. A while back, we saw Australian wine producer Treasury Wine Estates [ASX:TWE] drop around 9% in a single day.
They reported the expected revenue decline as a result of coronavirus. But beyond this was the ongoing threat of Chinese trade hostility in the form of tariffs.
It seems China is punishing Australia for its allegiance to the US. But that is far from the only reason. Australia has a tit-for-tat trade war going on with China too. Despite the existence of a free trade agreement, Australia has more anti-dumping measures against China than any other country. Covering electric cables, wind towers, glass, A4 copy paper, chemicals, herbicides, aluminium products, and steel.
But the trade threat is serious to TWE. Asia makes up about 40% of the Company’s EBIT, with the lion’s share of that coming from China.
Fearful investors dumped TWE. And the stock appeared to enter ‘oversold’ territory.
But it only makes sense to sell if you believe the future prospects of the company are severely damaged. Because as an investor, you’re investing in growth and income for tomorrow.
TWE in fact has options open to it. It is able to reallocate wine to Europe and the US. And boost investments in its overseas vineyards. Such as those in France which would not be caught by potential tariffs on Australian wine.
While the downside is increased risk profile from the China threat, the upside is a strategic positioning toward a more globally diversified business.
And for any sensible long-term investor, relying too much on one market — especially the authoritarian state of China — was always a risk in itself.
TWE could build a stronger business. Its premium wines continue to face growing demand around the world. With excellent margins. And it seems unlikely going forward that China is going to wage an ongoing and total trade war with Australia. When China is seeking to build more free trade in the region.
We bought some TWE in the high $7s.
It seems the market has now become more circumspect over the risk. As I write, it is priced back above $11 with a dividend yield of around 2% p.a.
There remains risk. But there was likely value.
There is a question I ask on every decision now. And you should too.
Since disaster throws up the sweetest opportunity, you have to watch your thinking. Especially when it is swayed wildly by fear or greed.
Keep asking this and you’ll become a better investor: ‘Is my thinking getting in the way?’
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. To obtain advice for your specific situation, please seek independent financial advice.)
Simon Angelo owns shares in Treasury Wine Estates [ASX:TWE] via Wealth Manager Vistafolio.
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