The venom of human emotions - Ben Whitmore, manager of Elite Rated Jupiter UK Special Situations, October 2016

The underlying principle of my investment process is that of value investing. I believe that lowly-valued stocks tend to outperform over time and I try to identify those with an edge to exploit.
Why structure the investment process in this way? Because I’m trying to find antidotes to some human behavioural biases or, as I like to describe it, the venom of human emotions.
In my opinion, three of the biggest pitfalls we make as investors are over-confidence, framing and anchoring. I’ll explain:

Over confidence 

If I told you that I know exactly what will happen in politics, economics and markets in next five years and I’ve perfectly structured my portfolios to take advantage, would you believe me? People like to project that kind of confidence, but I’m really not convinced by it; the simple fact is that I don’t know what will happen and I don't believe anybody else does either.
The antidote to this human emotion is basically not to forecast at all! I simply look at how a company is valued today, based on its historic earnings over a long period. And if I decide to invest, I do so for the long term: I’ve held more than four fifths of the companies currently in this fund for more than 9 years. 

Framing 

The world is full of data today. But we all ‘frame’ that data (or interpret it) in different ways and can therefore give it different responses. Is your glass half full or half empty? Are you 70% likely to win a prize or 30% likely to lose? Companies use framing all the time, steering investors towards the conclusion they want.
My attempted antidote to this is that I only conduct statutory analysis of balance sheet and cash flow – those show the sometimes gruesome reality of a company’s accounts. 

Anchoring 

In the investing world, ‘anchoring’ refers to the danger that one’s initial exposure to a share price becomes the reference point against which subsequent judgements are made. The valuation of the company in its proper historical context is much more important in my view, which is why the screening process is the potential antidote used to combat anchoring. 

I think this topic is tremendously important. I’m not saying that I am immune to the venom of human emotions, but all investors are being attacked on a daily basis by these natural biases and, by putting in antidotes, we’re giving ourselves a chance to avoid being too badly caught out.