Part of our process is carefully considering the assumptions current market narratives are based on, turning them inside out, and seeing if their logic holds when subjected to scrutiny. Prevailing narratives often come with a big cautionary footnote, which most investors overlook in their hurry to join in on the market mayhem.
Narratives not only apply to the stock market, but also to our understanding of the changing world companies operate in. They make it seem like the future is already written, with the outcome determined well in advance. By extension, anyone wanting to benefit from the trend, simply has to get onboard.
The online shopping revolution provides a case in point. When the Covid-19 pandemic struck, markets reacted wildly. One of the prevailing narratives that has emerged, is that brick-and-mortar retailers are dead, and that the future of shopping is online, and online only. This story has great appeal and fits our perception of the world, but it also makes it easy to forget the trend is not as one-directional as the narrative would imply. Shopping is a sensory experience and there is a social aspect to it – and these are not that easy to replicate online. In fact, some online retailers like Amazon and Casper (which sells mattresses) have opened physical stores as real-life experiences help drive online sales.
More fascinating however, is that omnichannel shopping may hold greater benefits for traditional brick-and-mortar companies. These have often lagged woefully behind the online retailers, but one benefit of slow-to-market implementation is that you can take the best learnings from tried-and-tested recipes, and avoid a costly learning curve. The benefit however emerges in how the market has priced these companies. While the share prices of online retailers have soared, those of brick-and-mortar companies have not priced in the effect of greater online sales as yet, and so there is a window of opportunity to acquire these businesses before their share prices adjust to compensate for a deceptively simple narrative.
Similarly, it is easy to get excited about e-cigarettes and their ability to breathe life (rather poor turn of phrase) into a mature tobacco industry in the face of growing opposition and regulation to smoking. E-cigarette alternatives have given this sector a renewed lease on life, but their own narrative is a complex and nuanced one, with their own lobbying, health concerns and regulation to contend with. We have also previously pointed out the deceptively simple narrative surrounding SA Inc. shares, which have seen these shares largely being written off, even where they are generating revenue from non-SA sources. Examples abound.
Whatever the headline-grabbing narrative of the day, there is usually more to the story than meets the eye. We aim to see the bigger picture and find the opportunities for our investors to benefit from these mega-trends. Often, the biggest benefits are not found where most investors tend to look. For patient investors with a long-term perspective, there can be immense benefits in investing in the unloved sectors of the market, where future potential is often overlooked in favour of current hype.
Current market conditions have in many cases set up prevailing narratives as conventional wisdom, fuelled by widely available media opinions and news. While this creates many pitfalls for unwary investors, it also creates immense opportunities for those willing to look beyond the noise.