Driving to Cape Town on the N2 last week I witnessed a young lady come to near standstill as she turned her head around to look-in her back window in order to check on approaching traffic before changing lanes. This is apparently the correct methodology taught at driving school and required to pass your drivers licence. The only probem is the young lady was sitting in the right-hand “fast” lane and had decided last minute to take the R300 exit, which meant she had to cross three clear lanes of traffic. Fortunately her guardian angel was on duty as she managed to somehow float through a sea of traffic seemingly oblivious to her near death experience while staring out her back window.
The analogy of “rearview” investing is well documented and a function of our recency bias. Investors subconsiously project the recent past forward by expecting the same returns of past to continue into the future. This explains why most investors are currently shunning the JSE in favour of the S&P500 and it seems obvious given that the JSE has delivered a zero return in dollars over the last decade while the S&P has increased 3.5X as illustrated by the chart below.
Now what if I told you the previous decade was the exact mirror image of this chart with the JSE outperforming the S&P500 in dollars. You probably wouldn’t believe me, right? But that is exactly what happended.
Our recency bias makes it near impossible for us to invest in the JSE, but if we apply the following common sense principles and engage our rational brain then maybe, just maybe, we can overcome our intuitive bias.
- The price you pay matters
- Sentiment in SA is extremely low; valuations are attractive
- Risk means that more things can happen than will happen
Here’s looking forward to the mirror image of 2020 for 2021 and beyond!
Mcomm, CFP®, HdipTax
T. 021-205 1133