Kennox’s investment style is logical, sensible and powerful, built upon fundamental human behaviours. Psychologists and behavioural economists observe that not-entirely-logical traits and irrational quirks slip regularly into human behaviour. For Kennox, key to note are that people:
This behaviour leads to opportunities where the financial markets overshoot – and where Kennox can take advantage. Judiciously practiced, bargain-hunting value investing exploits these opportunities.
Kennox seeks out the pricing/valuation advantages that arise from these quirks. There are stocks where the market prices in a negative- to terribly-negative outlook but where the much-more-likely outcome is more benign (or even positive).
Most often for Kennox this is exhibited in the form of short-term headwinds. The extrapolating mind of the market views any headwind as an ominous and permanent risk. This gives a price drop. This price movement transforms into a genuine opportunity only when we assess that the headwind is temporary and the long-term risk profile has not changed – or even improved, as survivors face decreased competition. Kennox refers to this as the J-curve, where temporary headwinds turn to tailwinds as the industry eventually cuts backs supply and/or demand recovers.
As these investments involve short term operational risks (ie the uncertainty or extrapolation that gives the price opportunity in the first place), we aim to minimise other risks (buying sector leaders, with conservative management, low leverage, etc). This ends up with very strong risk-adjusted return profile – ie we can have our cake and eat it too.
Lastly, as stewards of our clients’ capital, we view ESG issues as serious long-term risks, threats to the viability of the franchise. Similar to any other risks, these can be misdiagnosed by herd-following investors. Kennox is able and willing to take a stance against consensus where warranted.
This framework sounds simple, but logical and independent-minded decision making, and the fortitude to stick with it, is not easy, and should neither be discounted nor taken for granted. Kennox is able to take advantage of the market’s quirks – quirks such as extrapolation, uncertainty and herding – by being logical and methodical, patient, and most importantly, entirely aligning our investment process with our beliefs in the world around us.