Natural order - Investors must resist the very human urge to do something rather than nothing
“Life finds a way.” This observation from cocky chaos theorist Dr Ian Malcolm as the dinosaurs begin to run riot in Jurassic Park appears in both the 1993 film and Michael Crichton’s original novel, published three years earlier. The ghosts of thousands of wild animals on one of Africa’s most famous game reserves would presumably rather that view had gained greater currency three decades earlier.
In the mid-1960s, a multi-year period of dry weather and concerns about overgrazing led officials at the Kruger National Park in South Africa to decide the number of zebra and wildebeest on part of the reserve had grown too large and, consequently, they should begin a cull. Between 1965 and 1972, some 3,300 wildebeest and 3,700 zebra were shot.
Despite this, the numbers of both species in this area of the park remained remarkably stable over this period – at around 13,000 zebra and 14,000 wildebeest. Then, at the same time as the cull finally appeared to be having some effect on animal numbers, a multi-year period of heavier than normal rains finally arrived – and the numbers of zebra and wildebeest kept on falling.
So although there was now plenty of lush grass, the zebra and wildebeest populations not only each hit the 10,000 figure the park officials had targeted at the start of the cull, they crashed straight through it. By the mid-1970s, the numbers of both species had roughly halved from what they were a decade earlier – to about 7,500 zebra and 6,750 wildebeest.
So the cull was stopped – yet still the numbers of zebra and wildebeest kept on falling. The park officials decided this must be down to an increase in the number of lion, hyena and other predators in that part of the park and began culling them instead. Unfortunately, while this action had a large impact on predator numbers, it made no difference to the plummeting zebra and wildebeest populations.
By the end of the 1970s, wildebeest and zebra numbers were in poor shape but then the weather changed again and, apparently unhindered by a new period of drought, the populations of both species boomed. By the early 1990s, wildebeest numbers had roughly doubled from their 1970s low to 12,500 while zebra numbers had almost quadrupled from that point to just under 30,000.
Park officials were initially perplexed as to why all this should have happened – although they eventually attributed it to both species preferring to eat shorter grass, which is easier to find in drier periods. The cover provided by taller grass in the wetter years also provided better cover for predators.
Whatever the actual explanation though, the fact is that when the officials went back and reviewed the records rangers had kept on the park over the previous couple of centuries, they found a very visible and repeating pattern in the populations of the zebra, the wildebeest and their predators.
This appeared to be driven predominantly, though not exclusively, by the weather – and especially the amount of rainfall the park experienced. However, this waxing and waning took the form of a long cycle, taking perhaps 10 years to work all the way through. With human nature being what it is, when something appeared to move out of balance in the park, the rangers found it very difficult just to wait and see how things panned out.
Instead – and on some levels quite understandably – the park officials agonised on a daily basis over whether animal population numbers were too high or too low. They felt they should be doing something – anything – to try and make things ‘better’ when, in fact, this was a perfectly normal fluctuation that would even out in time, if left well alone.
We see parallels between this story and the world of investment – especially with regard to mean reversion. As we have suggested before, in articles such as Something or nothing and Eyes front , resisting the urge to meddle and just leaving well alone is an important investment skill to master.
At one level, therefore, the value investor does not really have to do very much. ‘All’ you have to do is hold your nerve, buy good businesses when they are unpopular and thus attractively priced, hold your nerve some more and own them until they are popular again and thus overpriced. In the meantime, aside from the nerve-holding and not being phased if things get worse in the short term, it is more a question of trying not to meddle.
Looking to do things to try and improve short-term performance – for example, by not buying a cheap share today because you believe its price will decline further before things start to improve – typically does more harm than good in the long run.
On the other hand, by being patient and strong-minded, you should be able to profit from the inevitable cycles that are as much a part of economics and investment as they are the natural world. And we will end it there before we are tempted to start quoting lyrics from a very different movie – something about a ‘Circle of life’ …
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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