The Motley Fool

Going with the herd can be bad for your wealth

The other day, I was in my local Tesco, having gone in to pick up some LED light bulbs. To my irritation, they’d only got one bulb of the type that I needed, and I wanted three. It was annoying, because a couple of days earlier, there had been an ample supply, and I had nearly bought the bulbs then.
At which point, I spotted them – on the shelf below, in entirely different packaging. Whereas the usual bulbs were packaged in rigid plastic outers, so that you could see the bulb, the bulbs were now packed in thin cardboard boxes, just like light bulbs used to be.

While I’ve no idea of the respective costs of the two form of packaging, or if cost-saving drove this particular decision at all, it clearly wasn’t difficult to see the sustainability agenda at work. With growing concerns over the disposal of plastic waste, and oceans – and fish stocks – becoming polluted by microplastic particles, you could see the logic.
I picked up the bulbs, and headed home.

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Paper packaging’s popularity

That same day, by chance, I read a suggestion that investors take a look at paper packaging manufacturers DS Smith and Mondi.
Central to the argument: e-commerce is driving demand for packaging, and increasingly environmentally-conscious consumers appreciate paper packaging’s sustainability credentials. It doesn’t harm the investment thesis, either, that DS Smith is apparently Europe’s largest cardboard and paper recycler.
Now, let’s be clear. I’ve absolutely nothing against either DS Smith, or Mondi, or the brokerage house that made the suggestion. All are fine companies, and – at various times – I’ve nearly invested in all three. More to the point, perhaps, I’d be happy to own all three now.
But that isn’t to say that I think that right now is necessarily a good time to get into companies that manufacture paper packaging. If demand for paper packaging is rising, then to my mind, that’s likely to be reflected in the share price.

Right now, I’d be more interested in seeing if there were any bargains on offer among supposedly beaten-down manufacturers of plastic packaging. RPC Packaging might have made a good candidate, up until its acquisition by America’s Berry Global Group early last year.

A cheery consensus costs you

As regular readers will recognize, I’m partial to this kind of thinking.
It’s exactly three years, for instance, since worries about a slowing global economy sent shares of resources stocks crashing through the floor.
As I’ve written before, Royal Dutch Shell dipped below £13 at one point, prompting me to load up on them, at a very attractive yield. They’re almost £10 higher now, standing at £22.80 as I write these words, and reached over £28 in May 2018.
The time to buy stocks isn’t when everyone is piling in, but when everyone is heading for the exit, driven by the latest panic du jour, whatever that may be.
For as Warren Buffett sagely remarked, you pay a high price for a cheery consensus.

Property worries

Today, I reckon that you can see a similar opportunity playing out in property stocks, where a number of specialist REITs – especially those exposed to the retail sector – have been trading on very low multiples over the past couple of years or so, as Brexit worries have sapped investor confidence.
For some, the tide has already turned. I’m up 40% in Primary Health Properties, which I bought in 2018, up 27% in 3i Infrastructure, also bought in 2018, and up 18% in Empiric Student Property, again bought in 2018.
And these were income picks, don’t forget – boring stocks where the earnings come from tenants renting the properties that they own.
Holdings in British Land, Hammerson and NewRiver Retail will yet come good, I hope. In the meantime, I’m enjoying the decent income that they throw off.

Sentiment overshoots

The real lesson from all this is a very simple one, I believe.
Markets move in cycles; so too do the prices of individual shares, as investor sentiment waxes and wanes. Confidence builds; confidence declines; prices rise; prices fall.
And almost always, in my view, sentiment overshoots. Sentiment is higher than is justified on the upside, and lower than is justified on the downside.

Put another way, Benjamin Graham’s characterisation of markets as manic-depressive is broadly correct.
The moral: avoid buying at the top; hold your nose and buy at the bottom.

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Malcolm owns shares in Tesco, Royal Dutch Shell, Primary Health Properties, 3i Infrastructure, Empiric Student Property, British Land, Hammerson, and NewRiver Retail. The Motley Fool UK has recommended British Land Co, DS Smith, Primary Health Properties, and Tesco.