One of my favourite reads is The Phenomenology of Perception. Written by French philosopher Maurice Merleau-Ponty, it was first published in 1945 and eventually got an English translation in 1962, the year after its author’s death.

To say the least, it’s not an easy text to absorb. Even Wikipedia’s summary can be baffling. But get past all the high-brow stuff about whether Cartesian dualism is everything it’s cracked up to be and you’ll come across a few remarkably useful lessons for investors.

I ought to admit at this stage that this isn’t why I originally seized on Merleau-Ponty’s work – less still why he produced it. I discovered it because it formed part of my degree studies.

Yet what I learnt as a student of anthropology many years ago continues to shape my thinking as a fund manager today. In fact, it’s no exaggeration to say it’s central to how my colleagues and I go about the task of building global portfolios of small-cap equities.

Why? Maybe the most straightforward explanation can be found in this line: “The alleged self-evidence of sensation is not based on any testimony of consciousness but on widely held prejudice.”

This was Merleau-Ponty’s way of suggesting that what we perceive might not be as “real” as we suppose. Instead, he argued, it’s more likely to be a result of pre-existing beliefs and assumptions.

Such an idea is of huge relevance to investors, because it touches on the perils of bias. In my view, investment decisions are likely to prove suboptimal if we allow our pre-existing beliefs and assumptions to shape them.

Clouded judgement

There’s a school of thought which holds that humans are inherently poor at making decisions. It might be more accurate to say we’re pretty good at making decisions but generally lousy at defining opportunity sets.

Investing offers a classic illustration. Presented with the right information, many people are eminently capable of choosing the businesses most deserving of their support. The challenge lies in determining and assembling the right information in the first place.

Bias is a major enemy here. If we hope to arrive at a value judgement – which is what an investment decision ultimately represents – casting aside all our preconceived notions is likely to leave us much better placed to do so.

Imagine, for example, that an investor – let’s call him Joe, as in “average Joe” – has a gut feeling that Company A is well worth backing. Particularly in the age of hyperconnectivity, validating this sentiment is a cinch. Merely Googling “Reasons to invest in Company A” is sufficient to reveal his instincts are spot-on.

Of course, a very different picture would emerge if Joe were instead to Google “Reasons not to invest in Company A”. But he isn’t interested in that, because he’s suffering from confirmation bias – a desire to reinforce his own opinions and reject anything that might contradict them.

Alternatively, let’s say Joe suddenly notices artificial intelligence (AI) is all the rage. Headline after headline tells him it’s the hottest investment theme out there. So he fires up his trading app and invests in Company B, whose profits have enjoyed an AI-related boost during the preceding month.

This is recency bias in action. Joe has placed undue emphasis on recent events and immediately extrapolated them into the future. Pre-existing beliefs and assumptions have once again muddied the waters.

From good habits to informed decisions

Anthropologists speak of “habitus”, a term used to describe how we perceive and react to the social world around us. Equity markets are themselves social constructs, so our habitus in this context is tremendously important.

What Joe’s habitus conspicuously lacks is process. He doesn’t grasp that his own opinions count for very little and that a reliable, repeatable, bias-free approach is far likelier to sort the wheat from the chaff. This is a common failing, with many investors unaware that what they think is frequently of far less significance than what everyone else thinks.

The process my colleagues and I use to make sense of the global small-caps arena aims to take full account of this crucial consideration. It’s designed to eliminate our own biases and so enable us to compare an essentially objective analysis with the thinking of the herd.

We develop an informed view of a business by amassing a wealth of quantitative and qualitative insights, including through direct engagement. To return to an earlier point: this gives us the right information to define an opportunity set. We can then see how our findings and conclusions stack up against the consensus.

Ideally, we should discover scope for unrecognised growth in businesses whose long-term appeal has escaped most investors’ attention. An absence of “widely held prejudice” – to go back to Merleau-Ponty’s phrase – is absolutely vital to establishing this edge.

So what does all this mean? Unless you’re especially intrigued by existentialism and a dialectical concept of consciousness, please don’t mistake any of the above for an entreaty to read The Phenomenology of Perception from cover to cover – life is short, after all.

As investors, we just need to remember a simple truth: bias is bad. It might sound like an obvious statement, but it’s one to which sizeable swathes of the investment community – whatever their preferred reading material might be – remain alarmingly blind.

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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.

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