Variant perception is the effort to become sufficiently knowledgeable about whatever the subject is, that at a time to be at variance from consensus, because one of the few sure ways to make money in the market is to have a view that is off consensus and have that view turned out to be right…That’s not enough you have to be right. A contrarian is a plus, but it’s not enough. To be a contrarian is easy, but to be contrarian and to be right in your judgement when the consensus is wrong is where you get the golden ring and it doesn’t happen that much, but when it does happen you make extraordinary amounts of money. And in order to do that you have to be intellectually advantaged. You have to go through that same routine in terms of intensity, focus and commitment and the sorts of things that makes anybody in any area I think superior.
Shakespeare said, “What’s in a name? That which we call a rose by any other name would smell as sweet.” While this appears true superficially, studies have shown that words can actually affect our perception of an object. Names matter. So, in this article we’ll explain the origins of our name, Variant Perception®.
What is a variant perception?
Starting with some simple definitions, variant is defined as “differing” or “not universally accepted.” Perception is defined as “the act of apprehending by means of the senses or of the mind.” So, a variant perception is simply a different way of looking at things.
But, how exactly do we perceive markets differently? Our company began by asking: why have 9 out of 10 economists missed 4 out of 5 postwar recessions? These economists are intelligent people with PhDs from top universities, so it was more than a smart/dumb issue. We realized that there was something systematically wrong with the way they were analyzing markets. We found that economists were taking the tools of academia and directly translating them into investing – this simply does not work.
The biggest structural flaw with traditional economics is that economists often focus on lagging and coincident data, instead of systematically following leading indicators.
Lagging indicators are those that lag the market – they tell you where the economy has been. A classic example of a lagging indicator is unemployment. If the economy starts to turn and sales decline for one month, companies don’t immediately start firing employees. It’s only after sales have declined for at least a few months that employees are let go.
Coincident indicators tell you where the economy currently is. An example of a coincident indicator is GDP. Looking at GDP would be like looking just at your feet when you’re running. You’ve already fallen off of a cliff by the time you notice the ground is no longer there. Looking at lagging and coincident data explains why economists are often wrong. If you are only looking at these indicators, you extrapolate past or current trends into the future.
How we perceive markets:
Fortunately, there is another way. At VP, we focus on leading indicators. An example of a leading indicator is building permits. If building permits decline, that means fewer homes will be built in the future, which will mean less income for home builders and less money spent on home furnishings, etc.
We believe that leading indicators make sense in any credit-based economy, regardless of political regime or market dynamics. This is because the sequence of economic events (like building permits above) will not change. We have used this approach to construct unique leading indicators for numerous countries and sectors.
Let’s take a past example. In early 2016, coincident data in Brazil was horrible.
Not surprisingly, economists hated Brazil and most investment professionals wouldn’t touch Brazil with a ten-foot pole. However, both our short and long-leading indicators were turning up sharply, giving us confidence that the Brazilian market was about to turn around.
How we’re variant:
If we see one of our leading indicators turning up or down, that is a perception. But, it isn’t necessarily variant. That’s why we have to take another step. We then look at valuation, sentiment and momentum to make sure that the trade isn’t already priced into the market.
Going back to the 2016 Brazil example, Brazil was cheap on a variety of valuation metrics, appearing in the green quadrant in the chart below:
Sentiment was also extremely negative and there had been significant outflows from the country.
This led us to aggressively recommend Brazil to clients. The BOVESPA was subsequently the best performing market in USD terms in 2016.
Overall, what we are looking for is instances where our leading indicators (our way of looking at the world) differ from the market.
Our approach is data-driven. We’re not geniuses with great hunches – no gurus here. We believe that we’ve developed a robust and repeatable “Variant Perception” that allows us to consistently deliver profitable investment ideas to our clients. We don’t get everything right, but in seeking asymmetric trades with high risk-reward, we do not need to be right all the time to make our clients money.