Artemis: How Odysseus could save investors from the market's excesses

Key takeaways

The story of Odysseus and the sirens has a lot to teach investors about FOMO, emotional decision-making and euphoria
The SmartGARP® team has, in a way, signed its own ‘Ulysses Pact’ (Ulysses being the latinised version of Odysseus)
In our view, successful investing comes from balancing growth, attractive valuations and positive earnings momentum, rather than chasing fads
Investing in unloved sectors can be rewarding, especially when earnings improve but sentiment remains weak
Focusing on objective data while applying selective judgement can help investors resist psychological biases

As Christopher Nolan’s new telling of ‘The Odyssey’ hits movie screens across Britain, I’ve been pondering what its hero might be able to teach us about investing, at a time when markets, in my view, are overheating.

When share prices are rising at what seems like a remorseless pace, it can be tempting to wade in and buy, for fear of missing out.

In the classic Greek legend, Ulysses (the latinised version of Odysseus) is determined to hear the song of the sirens but knows it will hypnotise him into acting irrationally, leading to his doom.

He makes what has become known as a ‘Ulysses pact’ with his crew. They strap him to the ship’s mast and then block their ears with wax. Ulysses is able to hear the sirens’ alluring though deadly singing but the crew sails to safety – for a short while, anyway.

So how do you resist the siren temptation of markets and psychological biases?

I learned a long time ago that the only way was to sign my own Ulysses Pact by creating a process that is 80% systematic and 20% subjective.

Our SmartGARP stock-screening tool analyses criteria such as growth, valuations and changes in profit forecasts. It essentially mimics what most fund managers say they do (although I often wonder whether they actually do so, in practice).

If you gave someone two stocks – a fast-growing one and a slow-growing one – they would, in all likelihood, choose the fast-growing company. If you offered them a cheaper company or a more expensive one, they'd rather buy the cheaper one. And if you asked, would you rather own a stock generating good news or bad news? They'd go for the business with good news flow.

So why do our SmartGARP funds – which consistently make these seemingly obvious choices – differ so much from their peers?

We think the majority of funds in our peer group still own a lot of quality stocks and are underweight value, despite value outperforming growth for some time now.

In general, news flow over the past five years has been good for cheap companies but quite negative for some quality stocks, I would argue.

For example, four years ago, everybody seemed to think LVMH was top of the pile when it came to quality, and yet over the past three or four years, there's been a steady drip, drip, drip of bad news¹.

The pharma company Novo Nordisk is a similar case. If you take the period from 2020 to 2024, Novo Nordisk was a hugely popular stock. Every fund manager loved it. We bought it early and enjoyed the benefits. As the earnings went up, the stock price went through the roof. The story made a lot of sense: Novo Nordisk had a duopoly on weight loss drugs in an era when obesity levels were rising globally.

In August 2024 the first cracks began appearing in the story. The company cut its earnings forecasts² as sales of Ozempic missed expectations, due to competition from US pharmaceutical company Eli Lilly and supply constraints. The computer said sell. We did. The share price subsequently collapsed and profits continued to fall³.

Following the sirens can mean you are blinded to opportunities as well as risks. After the global financial crisis, banks were cheap and their earnings kept falling. Fund managers around the world became increasingly negative. Even when earnings started to recover after the Covid pandemic, banks remained unloved.

Many still consider them low-quality businesses. They might be, but their earnings are still rising and slowly but surely, share prices have been following. Management teams seem to be doing sensible things – buying back shares and avoiding crazy acquisitions.

Some banks have better SmartGARP scores than others. The Artemis SmartGARP European Equity Fund’s top 10 holdings feature France’s BNP Paribas and Société Generale, Spain’s Banco Santander and Banco Bilbao Vizcaya Argentaria, Italy’s BPER Banca and Hungary’s OTP banking group. Together, they account for 21% of the fund⁴.

We have owned different banks at different times, as prices have caught up with the improving story.

We have been doing the same thing in the healthcare sector, where we sold the Novartis recently – after it has risen by more than 30% in the past year⁵ – and bought Sanofi. Over the past decade, Novartis’ earnings growth has been about 2.5% greater than Sanofi’s, but in the past year, Sanofi’s earnings have been better⁶. Whereas 15 months ago, the two stocks were on a similar price-to-earnings (P/E) ratio, today Sanofi’s is about half that of Novartis⁷.

In the past three months, oil stocks have had significant profit upgrades, but we all know why that is. This is where the subjective part of our investment process kicks in. We conduct additional research and apply common sense to recognise when the data might be temporarily skewed.

In other sectors, such as travel, airlines, food/beverage and telecoms, analysts have been downgrading their earnings forecasts for a range of companies. We’d rather sail around these rocks.

The call of the sirens is strong. Our impulses and emotions get in the way of smart thinking. Yet if you can focus on the data and buy stocks that are cheaper than the market but growing a bit faster, and are generally under-owned by investors, experience has shown us that the odds tend to stack up in your favour.