Brandes Quarterly Letter – Q4 2016


When the 2016 history books are written, there likely will be long entries about the failure of the pollster forecasts that year. As shown by the Brexit vote in the United Kingdom and the U.S. Presidential election result, the consensus among pollsters and pundits was spectacularly wrong.

How could sophisticated collectors and analysts of polling data get it wrong by such significant margins? Without commenting on the politics, we think that behavioral science can partially explain what happened.

Behavioral science broadly tries to understand how basic human emotions impact decision making. Concepts such as hindsight, herding, overconfidence and extrapolation are just some of the biases that may adversely affect our choices. Click here for definitions of these behavioral biases.

After the Brexit vote and the U.S. Presidential election, some pollsters agonized over what went awry. Even more behavioral biases seemed to come into play as some tried to explain that their forecasts weren’t wrong; it was the data. One high-profile U.S. pollster took comfort in the belief that he was “less wrong than all the others.” Despite significant changes in polling over the past decade that may have made results less reliable (see related article), many pollsters, pundits and members of the public still assumed they were as dependable as ever.

Our point here is that just days and hours before the referendum in the United Kingdom and the election in the United States, the consensus suggested outcomes that didn’t materialize. However, in the fullness of time, there was ample evidence to suggest that what actually happened could have reasonably been predicted. In other words, at the risk of succumbing to hindsight bias, it appears the indication was there; yet many pollsters and predictors could not overcome their basic human behavioral biases when interpreting the data and reaching their conclusions.

We believe there are very similar parallels in investing today. Taking a look at the valuations for U.S. equities and their European as well as emerging-market counterparts (click here to see the chart), we believe rational, evidenced-based decision making would favor investing in Europe and emerging markets over the United States. However, asset flows since the beginning of the year suggest the opposite as investors continued to favor U.S. equities. Is this trend driven by some of the same biases mentioned above?

We have also observed some behavioral biases when it comes to investment style. Until recently, various global value indices underperformed growth benchmarks for a historically long period. In this environment, the compulsion to generate improved performance—often over the short term—has led many investors to steer away from value managers. However, just when a lot of assets had flowed away, the value style staged a sharp reversal, with performance so far this quarter marking one of the strongest periods of value’s relative returns versus growth in recent history.1 Does investor behavior in avoiding value following its underperformance sound like an extrapolation bias?

The study of behavioral biases in the investment world is not new. Our late mentor and the father of value investing, Benjamin Graham, explored this topic extensively. He insightfully wrote in his seminal publication, The Intelligent Investor, that “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

As exemplified by recent investor preference for U.S. equities and aversion to value investing, behavioral biases may keep many market participants enamoured with what has done well recently and cause them to stay away from what an unemotional analysis of the data is telling them. Some practitioners offer tools to help investors make more rational decisions. The Brandes Institute has done much work in this area and we encourage you to view some of the tools that we designed to help investors.

As Graham alluded, value investing is a very easy concept to grasp but hard to execute. Its success depends on avoiding biases in making decisions while seeking to exploit the biases of others. At Brandes, we like to say that we are purpose-built for value—it’s all we do. We’ve structured our firm, from its founding in 1974, to deliberately keep us away from the behavioral biases that, we believe, plague many investors. When the 2016 history books are written, behavioral biases may help explain how most pollsters, pundits and members of the public got it so wrong. From these historic events, investors may glean a lesson or two on the perils of forecasting.

Wishing you happy holidays and emotion-free investment decisions in 2017.



1 The MSCI World Value Index returned 6.0% quarter-to-date as of 12/9/2016, vs. -1.3% for the MSCI World Growth Index. Recent history refers to quarterly performances of the indices for the last three years. Past performance is not a guarantee of future results. Please note that all indices are unmanaged and are not available for direct investment.

The MSCI World Growth Index with net dividends measures equity market performance of developed markets. The attributes for growth index construction are long-term forward earnings per share (EPS) growth rate, short-term forward EPS growth rate, current internal growth rate, long-term historical EPS growth trend, and long-term historical sales per share growth trend.

The MSCI World Value Index with net dividends measures equity market performance of developed markets. The attributes for value index construction are book value-to-price ratio, 12-months forward earnings-to-price ratio, and dividend yield.

The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (

The Brandes Institute is a division of Brandes Investment Partners®. The Institute strives to challenge assumptions and raise awareness on diverse aspects of investing and portfolio management. Collaborating with progressive thinkers, the Institute provides a forum for investment insights and their practical application.

Past performance is not a guarantee of future results. No investment strategy can assure a profit or protect against loss. The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. Market conditions may impact performance.

International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. There is no assurance that a forecast will be accurate. Because of the many variables involved, an investor should not rely on forecasts without realizing their limitations.

Some of the recommended reading has been prepared by independent sources which are not affiliated with Brandes Investment Partners. Any securities mentioned reflect independent analysts’ opinions and are not recommendations of Brandes Investment Partners.