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To Hell With Herd Mentality – Broyhill Asset Management

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HFA Staff
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Herd Mentality

In an ever-changing market landscape, making informed and strategic investment decisions has never been more crucial. Today, Broyhill Asset Management is pleased to share with you their latest presentation, To Hell With Herd Mentality. In this piece, Broyhill navigates the complexities of investing with a focus on independent thinking and disciplined value investing.

Key highlights include:

  • The current state of the market and the dangers of following the herd.
  • Strategies for capital preservation and compounding long-term returns.
  • An analysis of historical market cycles and their relevance to today's investment decisions.
  • The benefits of a value-oriented approach and why patience and discipline are your greatest allies.

To Hell With Herd Mentality

Herd Mentality

We often say, “you don’t need Broyhill in a bull market.”

The benefits of our approach are difficult to distinguish during good times but prove their merit during difficult times.

We expect to trail the market when animal spirits lead the way but aim to more than make up the difference when the herd reverses course.

Herd Mentality

Recent performance provides a good illustration of this dynamic, as we’ve essentially experienced a full market cycle over the last few years. Markets fell sharply in
2022, with the most speculative assets hit hardest. We managed to preserve capital in an extremely challenging environment. As markets rallied in 2023, led by
many of the same speculative assets, we still generated respectable performance.

Looking at the total period in the aggregate, one thing becomes very clear: defense wins championships.

Long-term returns compound greatly when complemented by capital preservation.

Herd Mentality

Value has been out of favor since I joined Broyhill in 2005. It has been out of favor since the inception of our equity strategy, and yet we’ve managed to outperform
by just about any measuring stick.

We look forward to seeing what we can do as that multi-year headwind transitions to a tailwind in the years to come.

Herd Mentality

Let’s check in on that transition...

Herd Mentality

This excerpt from Mackay’s classic on the “madness of crowds” was first published in 1841.

Unless Musk’s Neuralink proves otherwise, AI is unlikely to change human psychology.

The same patterns have played out again and again throughout history.

Herd Mentality

A disconnect between fact and fiction lies at the heart of all great asset bubbles. Technological change has been a constant for centuries, but once in a lifetime, new
technology promises a revolutionary shift in the economy and huge rewards for riding the wave of profound change.

Nothing captures the collective imagination of investors like technological change. Today’s Absolute Insanity may have legs, as investors are again captivated by
shiny new toys and one hell of a compelling narrative. But those investors would be well served to recall that all manias are built on a foundation of truth.

It’s just that, eventually, that truth becomes so stretched it is discounted by the market. At that point, continued outperformance depends on that truth being stretched
further than already glowing expectations. Those lucky enough to spot these waves early and skilled enough to ride them successfully without falling off stand to
generate tremendous wealth. Unfortunately, most of us mere mortals are not that skilled. As such, the most logical, rational, and prudent course of action is to
recognize when such themes are stretched to extremes and promptly step aside, as such extremes represent dangerous distortions that can trigger very unstable
unwinds. These conditions may elevate risk to portfolios; at the same time, they elevate opportunities for others.

Herd Mentality

We have seen a number of these “secular” themes come and go over our decades of experience. Markets dominated by the “new, new thing” is not a particularly new
development. But the current level of intensity does feel different. The one commonality across all of them: when the herd is running, nobody wants to get in the
way.

Today’s herd is running faster than ever, with surging animal spirits driving markets higher since the last big selloff in October and momentum stocks leading the
way to an extent not seen since the dot-com bubble.

See the full presentation here by Broyhill Asset Management

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.