A young wildebeest steps into the Mara River unaware of the danger lurking just below the surface. Suddenly, the water splits, a flash of greyish green—and 15 feet of muscle surges forward, dragging the unsuspecting victim into the water.
After months of not eating, the crocodile’s patience pays off in a split second. While other predators must hunt daily to survive, the crocodile’s incredibly slow metabolism allows it to conserve energy for months (even years!) until it finds an opportune moment to strike.
Long-term investors can embrace a similar approach to great effect. For example, an investor may believe that a company has an excellent business model and is run by strong leaders, but finds its stock valuation too expensive. Using a crocodile investment approach, the investor can wait patiently for a better risk-reward proposition to emerge and, instead of allocating capital at an unattractive price, opt to act when the odds of success are strongly in the investor’s favour.
Those who successfully apply this investment approach tend to have a competitive advantage over their peers. Good crocodile investors can take advantage of fear in the market and allocate a large amount of capital at good value. They can wait during periods of investor frenzy when the price for a coveted asset is bid up too high.
While a crocodile investment strategy makes a lot of sense in theory, it can be difficult to implement in practice. Crocodiles have evolved over thousands of years to be patient, but humans have not. In fact, many investors’ relationships with risk are exactly opposite to that of the crocodile: acting aggressively when the perceived risk is low but the actual risk is high, and failing to act when opportunities present themselves because their perception of risk is distorted. Unfortunately, it is our own conditioned responses—millions of years in the making—that pose the greatest hurdle to successfully adopting this strategy.
So what does it take to defy our evolutionary biases? While evolution may not have equipped the human brain with inherent rationality and patience, these traits are possible to attain in the appropriate environment. At Mawer, we find a disciplined, systematic process and the right team can help investors keep their cognitive and emotional biases in check. Ultimately, process is what allows investors to do what they otherwise may not: act strategically on the right opportunities.