Unfortunately, this investment is not available for the investor type and location you have selected. Please consider the alternative funds or contact us to explore all your options.
Please confirm that you have read and understand the following terms of use of this website.
You are about to access the pages of Harding Loevner Funds plc, an Irish umbrella type open-ended investment company (the “Company”), which contains information about the Company and its sub-funds (each a “Fund”). These pages are for informational purposes only. It is not investment advice, nor is it intended to be relied on as a forecast or research and does not constitute an offer, recommendation or solicitation to buy or sell shares in any Fund. Access to and the information contained in these pages are restricted to persons who are residents of jurisdictions in which the distribution of the information herein is permitted. Please consult your professional advisers if you have questions about a particular investment or are unsure of the laws and regulations applicable to you.
Investment in any Fund may only be made in accordance with the terms of the relevant offering documents, and subject to the laws and regulations applicable in which the offering documents are distributed. Please further note that not all Funds are available for distribution in all or the same jurisdictions. No information regarding the offering of shares of the Funds is intended for, nor will offers or sales of such shares generally be made to, residents of the United States of America, its territories or possessions. In particular, neither the Funds nor any shares are or will be registered under the U.S. Securities Act of 1933, as amended, the U.S. Investment Company Act of 1940, as amended, or otherwise in the U.S. and may not, except in a transaction which does not violate U.S. securities laws, be directly or indirectly offered or sold in the U.S. or to any U.S. persons.
By clicking on the “I Agree” button below, you acknowledge that you have read and understood this disclaimer and wish to proceed to these pages.
Harding Loevner is not responsible for the content, accuracy, or timeliness and does not make any warranties, expressed or implied, with regard to the information obtained from other websites. These links are provided for your convenience and for navigational purposes only. They should not be considered a recommendation to buy or sell any securities. It should not be assumed that investment in the securities identified has been or will be profitable.
By clicking on the "I Agree" button, you acknowledge that you have read and understood this disclaimer and wish to proceed.
Skiing in Avalanche Terrain Is a Lesson in Risk Management
February 15, 2024
Cognitive biases can wreak havoc on decision making. That’s why the Harding Loevner investment process is structured to help avoid errors in thinking that can lead investors to make irrational decisions. By identifying a strict set of criteria for the companies we hold and the method by which we track and debate these requisite characteristics, there’s less room for human behavioral flaws to influence our actions.
Backcountry skiers—who routinely navigate avalanche-prone terrain—seek to avoid danger in much the same way, says Patrick Todd, CFA, a portfolio manager and analyst at Harding Loevner. For example, every trip to the backcountry involves scrutinizing the snow conditions beforehand and making a pre-commitment that outlines the actions he and his group will take should the conditions differ once they ascend the mountain. Sometimes, the best decision is to turn back despite the time, effort, and money that already went into the trip. When skiers wrestle with this decision, it’s the sunk-cost fallacy at play, one of the many cognitive biases that can rear its ugly head in backcountry skiing—and investing.
In the video above, Patrick discusses more of the parallels between the risks in investing and backcountry skiing and how a thoughtful process can mitigate both.
By Simon Hallett, Vice-Chairman | December 20, 2023
We often hear about the value of experience in the investment business. But what, really, is that value? Implicit in the idea that experience is valuable is a belief that experience necessarily leads to expertise. (I’m using psychology professor Gregory Northcraft’s definition of being a expert here—experts have superior predictive models that work.)
In many areas of our lives, we can, in fact, learn from our experiences. Over time we start to see patterns in events and that pattern recognition enables subjective judgment, or what is often called intuition. But those patterns need to be recurrent, in environments where there is a clear and stable relationship between cause and effect, so that history really does repeat itself.
In his book Range, David Epstein described that sort of learning environment as “kind”—patterns repeat, feedback is immediate, and experience can lead to expertise. As he writes, “In golf or chess, a ball or piece is moved according to rules and within defined boundaries, a consequence is quickly apparent, and similar challenges occur repeatedly…. the player observes what happened, attempts to correct the error, tries again, and repeats for years.”
In contrast, in the sorts of learning environments that Epstein describes as “wicked” there are few (or no) clear rules and feedback is limited at best. In these kinds of environments, experience teaches you little. Indeed, it can be dangerous. Experience can lead us to over-interpret, to see patterns where there are none, and to become entrenched in our ideas.
Once we have an idea, it is extremely hard to change our minds. Confirmation bias means that we see evidence that confirms our views and ignore that which challenges them. When facts change, we should change our minds, but we rarely do. And cognitive entrenchment means that the more experience we have, the more difficult we find it to adapt to changing circumstances. With greater experience comes rigidity.
The fact that more experience can lead to these behavioral pitfalls is a good reminder that it’s important to pay attention to smart, inexperienced people. Often in organizations, seniority can lead to one’s views being accorded more weight, while more inexperienced colleagues’ views are often dismissed as lacking sufficient wisdom.
Investing, obviously, takes place in a wicked learning environment. The relationship between cause and effect on market prices is highly obscure. Few patterns repeat and, once identified, are arbitraged away and do not persist. There is no evidence, for example, that market participants can forecast the direction of markets, let alone macroeconomic or political variables.
Furthermore, for long-term investors such as us, it is hard to identify the right feedback to our decision-making. Our goal is to construct portfolios that outperform the broad markets on a risk-adjusted basis over extended periods. But returns are very time dependent, and short-term price movements are a poor guide to long-term returns, offering us poor feedback on our decisions. We must look at our investment theses and create our own feedback loops so that we can test whether the fundamental insights we are relying on to forecast outperformance of the stock of a particular company remain valid. And to overcome cognitive entrenchment, we must be prepared to update our beliefs—our forecasts—if the facts change.
This sort of learning environment is why when it comes to investing, experience doesn’t lead to expertise. It leads, simply, to experience—more opportunities to learn, more chances to understand the boundaries of our knowledge. But those chances are very, very valuable.
One of our basic beliefs about equity markets is that they are efficient, but not entirely so. There are inefficiencies that result from the biases of market participants, and to overcome our own biases and exploit those of others, we have structure and process—or rules—that govern how we do research and provide the background to the judgment required about when to buy and sell stocks.
But are there any permanent rules in investing? Rules are important for controlling cognitive biases, but they are not unchanging dogma. We should be prepared to change our rules when the environment changes or when they do not work. In an investment firm, humility about our ability to forecast accurately is important, and so is an open-mindedness about rules. More experience gives us the ability to look at our own behavior, to observe the errors that we make—usually because of our own biases—and to implement structures and processes that help mitigate the all-too-human tendency to make decisions where the results do not contribute to achieving our goals.
I know less now than I thought I did when I was new to the investment business 45 years ago. What experience has taught me is the importance of being aware of market history but not relying on it to make forecasts. It has taught me that how we behave is more important than what we know. And most importantly, experience has given me more chances to test ideas in the marketplace, receive feedback, and use that feedback for continuous improvement.
By Yoko Sakai, CFA, Director of Research | December 13, 2023
As bottom-up investors, we aim to invest in high-quality growth businesses at reasonable prices to provide superior risk-adjusted returns over the long term. To determine what constitutes a high-quality growth business, we research a company’s management, financial strength, growth prospects, and we closely examine the industry in which it operates to determine the company’s competitive advantage.
It’s as important to examine a company’s industry as it is to examine the fundamentals of a company. An analysis of industry structure can inform how well-positioned a company is relative to competitors, as well as the profit potential for the company.
In this six-part video series, we examine each Porter Force and discuss how we use them to analyze industries. Watch the series introduction below and click through to see how we leverage Michael Porter’s Five Forces framework for industry analysis.
People are deeply flawed when it comes to making investment decisions. It is vital for active investment managers to be aware of their own behavioral defects as humans and counter these shortcomings with process. Good active managers must be able to identify their “sources of edge,” the characteristics that enable them to generate sustainable alpha.
The sources of edge are often described as Informational, Analytic, Decision-making, and Organizational:
Informational
In an era of Artificial Intelligence and Big Data analysis, it’s very hard to generate an informational edge through data acquisition alone. Those who do find anomalies see them quickly arbitraged away. There is, though, the possibility of generating an edge by extending your time frame. A large segment of the market today is concerned with generating products based on dataset analysis, which generates excess returns for short periods of time, in the full knowledge that that advantage is temporary. However, no one has been able to turn the identification of companies that can generate returns over long periods of time into an algorithm. Focusing on long-term industry competitive dynamics and individual companies’ own competitive advantages within their industries can lead to insights that short-term data analysis often misses.
Analytic
Separating signal from noise can provide a potent analytical edge. As Benjamin Graham wrote in The Intelligent Investor:
“People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick to them.” Having a series of rules that help determine the passage of a company from the wider universe to research coverage is extremely helpful. Being structured in how to conduct research and pre-committing to the characteristics sought in a company are essential. Be objective in embracing what works from quantitative processes and systematic fundamental analysis. Structure and discipline help overcome human biases. Admit and learn from mistakes to be more objective and establish a framework to help analysts communicate with colleagues. The structure and discipline will help them focus on what’s important, and filter out what is not.
“Focusing on long-term industry competitive dynamics and individual companies’ own competitive advantages within their industries can lead to insights that short-term data analysis often misses.”
Decision-Making
Understand that all human beings have biases that inhibit both thorough analysis and sound decision-making. A good manager needs to set up structures to overcome these biases, and make sure that all team members stick to those structures. Overcoming our emotions and learning how to avoid cognitive errors should be at the core of any process that results in making decisions, especially decisions made under conditions of great uncertainty, which clearly includes investment decision-making. Conviction and confidence help sell ideas but may not be accurate guides to the success of those ideas.
Organizational
Incentivize analysts to get their decisions right, not to persuade portfolio managers. How an organization is structured, and how its people are incentivized and compensated, can provide the background that facilitates good decision-making and is thus a source of “organizational alpha.” For example, incentives should in part focus on long-term performance so that they’re aligned with the long-term nature of the informational and analytical edge. Moreover, individuals need to be accountable for their decisions to avoid the blame game that arises from consensus or group decisions. Finally, a good investment manager needs to communicate with clients, and, above all, set their expectations accurately.
At Harding Loevner, we think we have an edge because of what we know about decision-making and the structure and discipline of the process. Our analysts provide the necessary ingredients for successful, systematic portfolio construction. Our decision-making structure imposes individual accountability, mitigates biases, and ensures continuity, leading to better decisions and aligning each of us with our clients’ objectives.
What did you think of this piece?
Disclosures
“Out of Our Minds” presents the individual viewpoints of members of Harding Loevner on a range of investment topics. For more detailed information regarding particular investment strategies, please visit our website, www.hardingloevner.com. Any views expressed by employees of Harding Loevner are solely their own.
Any discussion of specific securities is not a recommendation to purchase or sell a particular security. Non-performance based criteria have been used to select the securities discussed. It should not be assumed that investment in the securities discussed has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner.
There is no guarantee that any investment strategy will meet its objective. Past performance does not guarantee future results.