As we should all appreciate by now, markets are inherently irrational. That’s what allows investors to make money from them. Human emotions repeatedly sow the seeds of opportunity.

This is why any investor who wants to beat the market has to accept their own view is seldom of paramount importance in the great scheme of things. More often than not, what really matters is everyone else’s view.

It helps enormously, of course, if everyone else’s view is mistaken. In the sphere of global equities, where our fund invests, this propitious situation frequently stems from behavioural biases and the lazy suppositions to which they give rise.

A vast body of research sheds light on the phenomenon. Although many of the studies may at first appear slightly esoteric – if not completely bonkers – the lessons that emerge are pretty consistent.

Take the snappily titled Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness. It might sound beyond nerdish, but at least taking part in the underpinning experiment must have been a hoot.

Subjects were invited to consume various wines, to which the researchers randomly assigned prices. MRI scans were then used to gauge the pleasure that drinkers derived from each bottling. Broadly speaking, the more expensive a wine was purported to be, the more excited people got.

As the paper notes, this finding challenges the basic economic assumption that the satisfaction gained from a good “depends only on its intrinsic properties”¹ . In fact, prejudice and predisposition usually play a huge role.

So it is with stock-picking. Many investors infer a company must be worth backing if it’s highly valued, if it enjoys an eye-catching spell of growth, if it’s earning plenty of column inches, if dozens of analysts reckon it’s wonderful, if the herd can’t get enough of it… and so on.

Naturally, there could be occasions when they’re right. But there could be many others when they suffer the investment equivalent of savouring what they believe is a Domaine de la Romanée-Conti and then discovering it’s actually a Château Screwtop.

The reverse can also apply. Hand someone a Musigny Grand Cru, claim you plucked it from the fridge at a bargain-basement corner store, maybe even serve it in a paper cup, and hey presto – the chances are that a negative judgement will be instantly formed.

This kind of knee-jerk thinking is also rife in investment circles. Investors may lose interest in a company at a stroke if it’s modestly valued, if it shows no obvious signs of growth, if it earns zero column inches, if analysts pay it no heed whatsoever, if the herd flat-out rejects it… and so on.

Ultimately, the problem here doesn’t lie in an inability to make sound decisions. It instead lies in an inability – or, perhaps more accurately, a reluctance – to assemble sufficient information in the first place.

Imagine, for example, that an investor is seeking companies capable of delivering long-term growth. This is what our fund aims to uncover in the global smaller companies arena.

Insufficient information – the sort that tends to be shaped by emotions, biases and other failings – might do the job in identifying expected long-term growth. But rather more is required to identify unrecognised long-term growth.

By way of illustration, consider Mueller Industries. Currently the biggest holding in our portfolio, it’s a US business centred on piping and industrial metals. It has a dominant home-market position in several products, copper and brass foremost among them, and it just keeps on growing.

The company had virtually no analyst coverage when we first thought about investing in it. Curiously, it still attracts next to none today. Yet our screening process immediately suggested potential that had somehow escaped the herd’s attention.

Having conducted extensive quantitative and qualitative analysis, including direct engagement with senior management and stakeholders, we constructed a model to project future earnings. Crucially, we then checked out the general market sentiment.

Underlining that everyone else’s view is what truly counts, our opinion turned out to be significantly at odds with the consensus. We reasoned our decision to invest was built on much firmer grounds than others’ decision to steer clear – and events ever since seem to have confirmed as much.

The bottom line is that bias is commonplace and counterproductive. But the good news is that it’s a shortcoming that’s central both to the functioning of markets and, by extension, to the success of investors who are willing to move beyond it – and I’ll happily drink to that.

Tobias Bucks is co-manager of the IFSL Marlborough Global SmallCap Fund

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¹See, for example, Plassmann, H, O’Doherty, J, Shiv, B, and Rangel, A: Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness, 2008 – https://www.pnas.org/doi/10.1073/pnas.0706929105.

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.