Information that is new or prominent tends to be valued more highly. Headlines drive analysis and valuation; we tend to assume that what gets most attention is the most important. However, recent share price moves show how wrong that can be. For several weeks, Randgold Resources, a leading gold mining and exploration company, saw little impact from the developing political unrest in Mali, where it mines two-thirds of its gold.
The turmoil in the country was largely ignored until the March coup instantly triggered a fall of almost 20 per cent in Randgold’s share price. Yet, the risk was entirely overlooked in analyst reports, which seemed to focus more on the short-term moves in the gold price.
Randgold’s February results were good, with the chief executive advising that “the continent’s socio-political environment is not the primary risk in building a business in Africa”. Yet, in the same month, but less widely reported, was the news that many thousands had fled Mali as rebellion became evident.
When a conjurer encourages us to look the wrong way, we are easily distracted. But analysts should not be diverted by companies’ sleight of hand.
Mali may yet return to peace, restoring Randgold’s operations. Yet what was remarkable was the binary move as analysts switched to sell on the day that fear hit the headlines.
Could this be repeated in other countries? Now, we see surprisingly little attention paid to China’s politics. The expulsion of a controversial politburo member has attracted relatively little analytical coverage. Chinese politics seem to be changing.
Just because the implications are hard to calculate, it doesn’t mean these issues should not be factored in to investment strategy. The risks should be incorporated into discount rates; and it may be wise to diversify more, or retain some cash to invest on weakness.
It is important not to give too much weight to recent or easily memorable information, or to anchor on remembered share prices.
To beat it, investors need a structured search process, scanning a range of less common news media and inputs, rather than always relying on the usual sources. An attempt should be made to quantify and allow for the unknown. Technical weakness can show that a few have been quick to spot some relevant news.
This technical position gave a week’s warning with Randgold, as the stock dropped below its moving averages.
How good an understanding do investors really have about the political environment in which resources companies operate? Investors often underestimate their margin of error. The global nature of western media creates an illusion of knowledge that gives false comfort.
However, the internet allows access to local news from around the world and can offer greater insight than the headlines that reach the West. Systematic search and factoring-in political risks are key ways in which investors can address psychological failings.
Colin McLean is managing director of SVM Asset Management. The views expressed here are his own.