11th Apr 2022
In this month’s Insight, Paul Marriage ponders the importance of being aware of one’s own biases as an investor.
Our office, reflecting modern-day Britain, has a broad range of approaches to the Divine from devout to detached. I’ve enjoyed sampling the odd portion of faith food along the way as colleagues generously share some special festive treats – you struggle to beat Hot Cross buns on that front for me. It often makes me think about what non-investment factors influence our decisions by our nature. If we are taught that gambling and drinking are to be shunned when we are young, does that make us not want to own those stocks even if they are potentially good investments? We have clients who quite reasonably set their own restrictions for us to follow as well – these have become more common as all things ESG have come to the fore – but many existed long before that acronym became de rigueur in the asset management industry. Were all competent fund managers brought up to be careful about money? I doubt it. Equity investors are inherently measured risk-takers, not diligent low-risk savers. When we have poor performance, we have usually taken too much risk, not too little.
The moral dilemmas of investing are complex and undoubtedly deserve more scrutiny than this author can muster when the whiff of seasonal morning goods is in our midst. Sectors that are deemed to be morally dubious attract a narrower range of investors and hence perhaps have less efficient valuations which by definition, are an opportunity. The sniff test usually works, if it looks and sounds a bit dodgy it’s probably best left well alone. We often ask ourselves when we meet a company for the first time; would we buy a second-hand car from this CEO? Will the company behave like you said it would in that hour-long pitch? You should ask the same of us when choosing your fund manager. Will your client’s money be managed in a way you feel comfortable with? Ultimately, most things unsavoury never make it to public markets – perhaps this is a shame as the scrutiny of public ownership might make participants in such sectors behave better to their staff, their regulators and tax collectors etc. The bids keep coming in for UK companies this year; should we sell out to the highest bidder or the one that is likely to be best for the company’s staff and customers? That’s a difficult judgement to make from a screen but we should always consider whether an extra 2-3% premium is morally acceptable if we think the new owner is unlikely to keep their promises. The irony of Cadbury’s, an early pioneer of enlightened industrial employment under the auspices of its Quaker founders, sold out to US peer Kraft who made a lot of promises about keeping factories open that soon fell away once that business was driven by activist investors to demerge into Mondelez and Kraft-Heinz has never been lost on us.
When a company gets into serious financial trouble, should the onus be on us to rescue it? The choices here are more limited to us. If a company is close to being valued at nothing, it is economically unviable; if a company has assets and some possibility of future cash flow, it will probably survive a near-death experience or two. Hence companies actually going bust on our watch are thankfully extremely rare; unless this has happened as a result of a significant fraud (e.g. Wirecard), we should have had an opportunity to exit before there is no value. Saving a company is not the remit of public market investors; if there is some strategic asset or powerful local MP with votes to fret about, then the government may intervene. If it’s simply a very high-risk binary outcome then some recovery experts may be attracted – vulture funds by another name. When it comes to jobs, we are much better placed to invest in growing companies that create more high-value jobs and train staff than extend the careers of those in structurally challenged industries.
One very simple area is politics. For us, it has no place in stock selection. We may sometimes not like government policy and how it impacts sectors and stocks but we have to lump it. The pandemic was a great example of this – even within a small team we had a very broad range of views on the rights and wrongs of how it has been handled – but we worked together to try and pick the right stocks at the right time. Companies acted very fast to secure their staff and offer flexibility that hitherto had been unimaginable. Only a very few corporates were overtly critical of government; this is perhaps more of a concern? Companies should be free to express their views and shareholders should be free to hear them and take a view. As the part funders of government largesse via taxation the corporate voice is important. The tendency for all sides in Westminster to view responsible capitalists as some sort of common enemy is an unwelcome trend that has gained momentum in the last decade or so and led to companies being overly defensive in how they communicate on tricky issues.
I once went on a skiing holiday in a shared chalet. On the first night, all the usual pleasantries were exchanged and a nice chap a little older than me said he was an undertaker. We had just invested in Dignity at floatation and I showered him with questions about crematoria profitability and consolidation opportunities etc. He was rather bemused and took me aside after a little while to say, sotto voce, I’m a GP but I just don’t want anyone to know. Naturally, I just switched to the merits of the different listed software companies that sold to GPs, poor guy. People often as ask me about stocks socially, after the disclaimer that I cannot offer them financial advice and suggest they run my answer via their wealth manager, I usually say that if the company in question is offering them a good service or product then it’s probably a buy and vice versa. This is dangerous territory; professional investors often fall in love with companies because they like what the company do rather than it being a good investment. I like Vimto (Nichols), Young’s pubs and Fever Tree tonic – generally that’s worked. Over the years I have also been drawn into Jimmy Choo (good in the end), Dr. Martens (good at the start), and Hornby Trains (never good). Let’s not get started on Lebanese restaurants (Comptoir) or PooNaNa nightclubs (Brighton Pier). Fighting one’s natural tendency to like something even when the numbers don’t stack up is evidently the toughest gig of all.
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