Face to Face: Emotional Intelligence and the Markets

January 2007
 

Robin Kollannur, CFA and co-manager of the Northern Large Cap Value Fund, talks about the psychology of value investing

Q: What’s your mandate as manager of a value fund?
A: A stock price is basically a voting machine. It represents the cumulative opinions of what people think that company is worth. Since human beings are theoretically irrational and emotions are involved, pricing gaps may occur between stock prices and company value. It’s our mandate to exploit these gaps for our investors.

Q: What are the challenges in value investing?
A: Essentially, we are buying the stocks that most are avoiding. So you need the conviction, fortitude and long-term focus to challenge the popular view. For example, we started buying telecommunications stocks in 2004-05 when the rest of Wall Street was avoiding them. Our willingness to go against the norm paid off. Telecom stocks were among our top performers in 2006.

Q: What special skills are required to manage a value portfolio?
A: You’re going against the herd, so you need to know how to value companies independent of public perception. That requires digging deeply into a company’s financial statements. However, a lot of emotional intelligence goes into playing the markets as well, because you need to understand how human emotions can influence decision-making. It’s not just who can build the best model for picking stocks, but who can understand the psychology of investors.

Q: What are some of the traps that plague investors?
A: People tend to fixate on the scrolling ticker, which results in short-term thinking. People tend to anchor on the most recent piece of information when weighing a complex decision. They also tend to overreact to bad news and underreact to good news; we’re hard-wired that way. You need to stick to a well-defined and rigorous process, which will lessen these emotional biases.

Q: How did you come to work in the value arena?
A: After working as a junior analyst for Wells Fargo Capital Management in Houston, I got a job at Brandes Investment Partners in San Diego. The founder, Charles Brandes, was a protégé of Benjamin Graham, the father of value investing. So I got a fantastic education on the history of value investing and how to apply it for our investors.

Q: How did your background shape your perspective?
A: I was born in the Kerala province in southern India. It was a former trading center for the Portuguese. At the age of 9, my parents and I immigrated to Corpus Christi, Texas. I’ve spent most of my career away from the big financial centers like New York and London. This has helped me to think against the herd, as I’ve been situated so far from it — a good place to be for a value investor.

Q: How do your hobbies relate to your work?
A: I’ve played competitive chess since I was a child. Chess is great training for the stock market. You need to understand your opponents and merge that with a fundamental analysis of the board and its myriad combinations. If you learn how your opponents think and move, you can play against them instead of against the board.