As investors taking actions day-to-day, month-to-month, year-to-year, it is easy to get lost in the data, the news flow, and the emotions that come with making decisions of where to allocate capital. 

We think it is important for investment success over the long-term to ask ourselves important questions which can ground us and help guide the investment decision making process.

The core question for all investors is quite simple, in our view:  what are we actually trying to do?

We see the answer to this question as lying somewhere between perception and reality. 

Perceptions of how the world works, how it is ordered, can sometimes diverge wildly from reality.  There may be a widely held believe which when examined via robust data collection and analysis turns out to be incorrect.  It is in this gap between perceptions and reality where opportunities and risks lie for investors.

Sometimes this gap in perceptions can have major implications.  Governments, financial markets, whole populations of people can respond to their distorted perceptions of reality which then have major real-world implications.

An excellent example of this is the public and media’s perception of terrorism.  If we look at data of media coverage from mainstream sources like New York Times and The Guardian, and then take all of the published news articles covering issues related to human fatality and split these by topic, you find more than one-third (>33%) of articles published are on the topic of terrorism.  More than 23% are focussed on homicide.  That means that more than half of these media articles in the mainstream media are focused on terrorism and homicide alone as subjects.   

This focus on subjects bleeds into public perceptions and, as a result, into government decision making.  If the fear of terrorism is high, governments respond to this with changes to the law to ‘fight terrorism’.  America even fought two major wars over the past two decades in the response to the perceived threat of terrorism.

But if we look at the data on causes of death in the United States, as a proxy for how worried people really should be about terrorism and homicide, we find something remarkable.  Terrorism was responsible for less than 0.01% of deaths in the US, while homicide was 0.9% of deaths.  So, in total, homicide and terrorism represent less than 1% of deaths in the US (and we can assume the Western developed world is close to being the same), while more than 50% of media coverage involving human fatalities was focussed on these subjects. 

This is a dramatic divergence between perceptions (“terrorism and homicide are something we should worry about!”) and reality (“these issues are a tiny fraction of deaths and really not worth worrying about at all”).  Gaps between perception and reality have real world consequences and are something everyone should be aware of. 

These gaps of reality versus perception can occur in financial markets too. And the result is that prices of assets can sometimes reflect the distorted perceptions rather than reality.  This creates risks and opportunities. 

If perceptions are too optimistic and you own an asset, there is a high risk of prices falling if reality catches up and is priced in.  On the flip side, if perceptions are overly negative, buying an asset can be a good investment idea as when (eventually) reality catches up with the price of the asset, the price should rise.  Sometimes it can rise a lot!

We see this perception to reality gap in many of the sectors we focus our research on. 

We have spoken in recent weeks about exactly this gap being a potential source of opportunity in the debate around artificial intelligence (AI).  The market perceives that some businesses are going to suffer significant disruption from the introduction of AI, and the prices of those shares have fallen dramatically in some cases to reflect that perception.  If that perception is wrong, if those companies end up doing just fine over the next several years, those share prices are likely to rise significantly as reality forces perceptions to shift again. 

Big news stories and controversial subjects like AI can be rich picking grounds for investors!  Tread carefully, but we think the dislocations thrown into markets by subjects like this, and many others, offer very interesting investment opportunities for the prudent investor.

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Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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