Building Your Pyramid: Stock Selection Through Maslow’s Hierarchy
Building Your Pyramid: Stock Selection Through Maslow’s Hierarchy
With the infectious energy of Taylor Swift's "Eras Tour" bound for Liverpool this weekend, it's hard not to think about the economic impact of millions of fans pouring into cities across the globe. The Swiftonomics report by Barclays Bank suggests the tour will boost UK spending by almost £1bn this summer alone, with fans estimated to spend on average £838 each.
The "Eras Tour" phenomenon illustrates the powerful link between human needs and consumer behaviour. Fans are motivated by a desire for connection, nostalgia, and perhaps even a touch of self-expression. This interplay between needs and choices is a core principle explored by psychologist Abraham Maslow in his famous Hierarchy of Needs. But how can this theory, developed decades ago, be relevant to your investment decisions in the current market?
A Psychological Lens for Investors
Imagine a pyramid, with the most fundamental necessities like food and shelter forming the base. As we climb this pyramid, our needs evolve, incorporating safety, social connection, and self-actualisation. This, in essence, is Maslow's Hierarchy of Needs, a psychological theory that offers a fascinating lens through which to view economic behaviour.
Forming the foundation of Maslow's Hierarchy, Physiological Needs encompass basic necessities like food, water, and shelter. Companies supplying these essential goods and services, such as consumer staples (e.g. Procter & Gamble) and utilities (e.g. National Grid), offer a level of stability in their demand.
Progressing up Maslow's Hierarchy, Safety and Security Needs involve physical safety, financial security, and stability. Companies operating in sectors like healthcare (e.g. Johnson & Johnson) and cybersecurity (e.g. Darktrace) cater to these fundamental concerns. Their focus on risk mitigation and safeguarding often translates into strong cash flows, making them attractive to investors seeking defensive assets during market volatility.
Sitting in the center of the pyramid is Love and Belonging which encompasses the need to feel social connections for emotional well-being. Whilst this factor doesn’t directly translate into traditional economic sectors, companies that facilitate social interaction have been growing into key players within the markets.
Social media platforms like Meta and entertainment companies like Netflix encourage the creation of online communities which can feed a sense of belonging through shared experiences.
The rise of companies that facilitate social connections has led to a debate as to whether this need has shifted to becoming more fundamental. Studies show a strong correlation between social isolation and mental health illness, suggesting that social connection is crucial for well-being and longevity (Holt-Lunstad, 2018). Covid intensified this debate. With physical interaction prevented by lockdown rules, the population turned to connecting virtually to maintain social connections, which resulted in companies such as Zoom seeing a surge in revenues.
Moving up the hierarchy, Self-Esteem needs relate to the desire for recognition and self-respect, which fuel economic activity through sectors that cater to personal development, image, and status. Companies associated with this are luxury retailers (e.g. LVMH) and even certain technology companies (e.g. Apple), who develop products that benefit from the aim of fulfilling this need. These companies continue to retain consumers through strong brand recognition and loyalty.
At the top of the pyramid sits Self-Actualisation, which represents the desire to reach one’s full potential. This can be related to creativity and contributing meaningfully to society. This may change behaviour from investing for a return to becoming more philanthropic with wealth and choosing to invest in companies that work towards a more sustainable future (e.g. Greencoat Wind).
Needs as a Driver of Returns
But how do these factors measure in terms of investment returns? It can be suggested that the base layers of the pyramid consist of assets that offer stability and reliability in terms of returns throughout periods of market volatility. They represent the base societal needs. This can be evidenced during periods of economic shock such as the financial crisis between 2007 and 2009, and through the COVID-19 Pandemic. Consumer staples remained resilient as an investment due to their defensive nature and stable demand being less sensitive to economic drawdowns. Consumers still require these products and services regardless of the economic climate. However, their focus on fulfilling fundamental needs can often translate to lower growth potential in upward markets.
Consumer Staples, Utilities and MSCI All World during the COVID 19
Pandemic in 2020
Source: Artorius, Bloomberg
Consumer Staples, Utilities and MSCI World during
2007-2009
Source: Artorius, Bloomberg
Conversely, in a bull market, consumer confidence is typically high, leading to increased spending on non-essential goods and services. This can be referred to as discretionary spending and can benefit companies in sectors related to self-esteem and self-actualisation. Consumers are more likely to splurge on luxury items during periods of economic prosperity.
Building a Solid Foundation
The current economic landscape, much like Taylor Swift’s ever-evolving musical style, is constantly shifting. With geopolitical tensions and central bank policy adjustments influencing the economy, historical correlations between asset classes and market cycles can change. Consequently, investing through the lens of Maslow’s Hierarchy of Needs requires understanding and attention to both the economic and investment cycles. This highlights the importance of crafting an investment strategy that not only aligns your individual risk tolerance and personal values, but also incorporates diversification.
Reference
Holt-Lunstad J. Why Social Relationships Are Important for Physical Health: A Systems Approach to Understanding and Modifying Risk and Protection. Annu Rev Psychol. 2018 Jan 4;69:437-458. doi: 10.1146/annurev-psych-122216-011902. Epub 2017 Oct 16. PMID: 29035688.
Rachael Faint
Portfolio Analyst
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