Few psychological biases are more destructive for investors than “anchoring” and “confirmation”. The ability to overcome both biases separate great investors from the rest.
Anchoring refers to that dangerous trait to rely too heavily on one piece of information. A stock that traded at $5 and now sells for 50 cents must be cheap. Why? Because the investor anchors his or her view of the stock’s value to $5, even though that price point is redundant.
Confirmation bias is even more insidious. It refers to the human tendency to seek or interpret information that confirms one’s existing beliefs. Investors who are bullish on a stock look for positive data to support their view, and vice versa. They stop questioning information.
I have seen anchoring and confirmation biases play out many times over the years with turnaround stock situations. Investors buy a stock too early in its descent, believing it is cheap, and blow up their portfolio. Anchoring tricks them into focusing on the past.
When the fallen stock is on its knees, confirmation bias is rampant. Investors look for information that supports their view on why the stock should be avoided. They stop searching for data that challenges their view and overlook opportunity.
Great investors do the opposite. They do not use past prices as a guide to value because they know share investing is about looking forward. The $5 stock might be a fundamentally different company at 50 cents and the $5 price might have been irrational to start with.
Great investors – and great leaders in all walks of life, for that matter – search for information that challenges their view. Great scientists, for example, are prepared to be proven wrong. They are open-minded to the fact that their hypothesis could be rejected.
Which brings me to department stores, a fallen sector if ever there was one, and a part of the market that has destroyed much capital, partly because of anchoring and confirmation biases.
Consider Myer Holdings, one of Australia’s largest department-store chains. Coles Myer divested the Myer business in 2006 to a US private equity group for $1.4 billion, which then relisted the department store on ASX through an Initial Public Offering (IPO) in November 2009.
The $4.10-issued shares capitalised Myer at about $2.4 billion. Those shares are now 58 cents, having fallen as low as 34 cents this year. Myer’s market value is $443 million.
Chart 1: Myer Holdings (long-term) Source: The Bull
Plenty of investors I know lost money on Myer. Some through the IPO; others from buying the stock after it halved, believing it was cheap. They anchored their view to Myer’s $4.10 issue price, even though the department-store sector has fundamentally changed.
With the future of department stores looking terminal, Myer is a constant stream of bad news. One broking report after another has focused on its problems.
I avoided Myer for years in The Bull. Having worked for decades in the media industry, I know the dangers first hand of companies in structurally challenged industries. Investors clinging to the past underestimated how far and how fast traditional media stocks would fall.
Value emerging, risks high
I took a tentative interest in Myer when it approached $1.20 in December 2016, suggesting to The Bull readers that the stock should be on the “radar of value investors, particularly if its price weakens” and that a takeover was likely if the price fell further.
Myer looks a lot more interesting at 54 cents, with three caveats. One, this is not a company for conservative long-term portfolio investors. As a small-cap stock, it suits experienced, active investors who are comfortable with higher risks in this part of the market.
Two, Myer’s challenges are intensifying. The e-commerce threat to department stores in Australia grows daily and Amazon is still ramping up its local presence. Consumers are favouring niche stores and young consumers have been conditioned to look for deals.
The once-great Myer has become stuck in a cycle of seemingly never-ending sales and brand-destroying discount bins at the front of stores to clear excess stock. Lower profit margins have intensified cost-cutting initiatives, further damaging customer service.
To compound its problems, the Australian economy risks a larger property-price slowdown. If house prices continue to fall, perhaps even correct by more than 10 per cent over two years, consumers will feel far less wealthy and some will curtail their spending. Who would want to be a discretionary retailer in such a challenging market?
Third, Myer’s appeal is partly in its takeover prospects. Veteran retailer Solomon Lew has been unhappy with Myer for years and appears to want control (perhaps, newspapers speculate, without making a formal bid or paying a large takeover premium).
One of the market’s savviest investors, Wilson Asset Management, has emerged on the Myer share register as a substantial shareholder, suggesting the department store will not go without a fight from institutional shareholders if a hostile takeover bid emerges. Myer shares are up lately.
Behind the corporate machinations at Myer is a new CEO in John King, who seems to be well received by the market. After years of failed strategies, poor execution and broken promises, the market could be forgiven for ignoring the latest plan to save Myer.
The bears keep focusing on Myer’s problems. But these are also an opportunity if King can transform its in-store customer experience, rebuild its product mix to focus on customer value, reduce its store footprint without hurting sales, and upgrade its online offering.
For all the challenges, Myer is still a household-name brand and has millions of current or former customers. There is much room for improvement. Even casual observers can see Myer’s in-store experience has deteriorated, its stores are full of bargain bins, there is too much wasted store space and its e-commerce capability is nowhere near where it should be.
I am not suggesting a turnaround is imminent or even that Myer has a long-term future in its current form. But a savvy retail CEO could squeeze more value out of the company.
Either way, I suspect we’re getting closer to corpoate activity in Myer – and possibly some extra value for long-suffering shareholders or a boost for new investors.
Chart 2: Myer Holdings (one year)Source: The Bull
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• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at September 19, 2018.