By Adrian Kempton-Cumber
Featured in this month’s Master Investor Magazine.
We live in an age where nothing is seemingly anyone’s fault any more. With the exception of meteorites and suchlike, that is just nonsense. “Have you had an accident at work that wasn’t your fault?” Well, legally must be someone’s fault, and if the lawyers can work out who, you’ll get paid. Boiling hot coffee is MacDonald’s fault, apparently. The financial crisis was the fault of somebody. Actually, here in the UK it was the regulator (the FSA) and the failure of government.
So, whose fault is it when you have an investment that doesn’t work? It’s yours. Assuming no one held a gun to your head (which I’m saying is highly unlikely), then it’s yours. I think there’s a general cognitive dissonance between when people make money on an investment tip, and when they lose on one. This can be illustrated by examining a simple language exercise:
You get a good stock tip: “I made money on my shrewd investment decision. Aren’t I clever!”
You get a bad stock tip: “They gave me a bad investment advice. Poxy morons!”
It’s the same scenario, but when the investment starts to go one way or the other, the fact that someone else came up with it seems to mean people will claim ownership themselves when it works, probably without even acknowledging the real ‘hero’ who actually did the work, but if it fails the investor will completely disown the decision process and claim they were duped, misled, given bad advice, etc. It’s pathetic.
Similarly, there’s a cognitive dissonance issue when it comes to the ability to make investment decisions. Most people seem to think that because they already have a job that requires some level of qualification – although presumably they wouldn’t expect to be able to pilot the Space Shuttle without further training – for some reason they imagine investing can’t be that hard, and they’d certainly be well equipped to do it. After all, stocks can only go up and down, can’t they? Simples! It’s good old Darwin at work when they lose money. Why would it be any easier to be a successful investor/trader than it is to be a successful surgeon? You’d never hear of courses boasting “become a successful plastic surgeon on our weekend course, and join the 3 hour work week”, because it’s palpably nonsense. But for some reason people expect to be able to go on a course for two days and become a hedge fund manager. No. A hedge trimmer? Maybe.
If you want easy money then become a London tube driver, and earn more than £50k “for sitting on your arse all day”, as the song by the Amateur Transplants goes. In fact if you earn less than £50k in London then you’ve already made a poor investment decision by not becoming a tube driver. The person driving you to work earns more than you. Own it!
So, if you’re not still in denial (in which case go back to the beginning of the article and re-read) then how do you get the information with which to ‘own’ an investment decision?
That’s a little more complicated. I think the key to it is being able to eliminate the false information and interpret the biased information. You have to establish the intent of the author.
Government data is usually intended to show that policy is working. Be most suspicious of the data that underpins key policies. As a result of this phenomenon, inflation levels have been way understated in official figures, both here and in the US, in order to avoid pressure to increase wages. They’ve also been in a constant state of flux in terms of constituents for decades now. In the US there’s a site called ShadowStats.com which produces data without the gerrymandering adjustments made by incumbent administrations. It tells a tale. And a consistent benchmark is of more value when looking for the real goalposts, which is what you need to do. It’s no good making a 9% return thinking that inflation is 2.7%, and you’ve done really well, when in reality it’s in the range of 8%-10%. If you must use official figures try at least to establish what they might be trying to tell you and back-engineer them if possible.
In terms of company announcements, the same applies. You have to weed out the spin from the momentum. Companies obviously want to paint things in as good a light as possible a majority of the time. They’ll tend to focus, in official releases, on things that are going well and give less emphasis to those that aren’t. Accountancy standards don’t seem to be helping here either. Not including profits unrealised at the date of reporting is a key point. One that Tesco seems to have misunderstood to the tune of £250m. Examine the sector and the competitor companies. You should be able to identify the reason(s) why a variance exists for the outlier company you’re looking at. If they’re performing differently to the competition there has to be a reason. You can’t make money without genuine variance.
You need to do due diligence as well. For example, it’s no good buying a share only to find that when you think you’ve made a good return, a large proportion of that is taken away by costs and the bid-offer spread because the stock is very illiquid. Make sure you check the financial health of the company too. Be wary if it has any pending court cases, etc. I mean, this isn’t rocket science but it’s just the sort of stuff people don’t do when they abdicate responsibility because, well, it’s a “tip from someone I really trust”. Don’t be lazy! And never rush in either.
In terms of tipsters: forget Shakespeare’s plays. You need a lot fewer monkeys and typewriters to make more good stock picks than bad stock picks in a bull market! In fact, a game of Pin the Tail on the Donkey with the FT markets pages will usually suffice. Where things are relatively imprecise in terms of timeframe and binary in nature, then making pronouncements is a good business to be in. It’s the same confirmation bias that makes people think praying works, when in fact the opposite can be demonstrated to be true by even the most rudimentary analysis.
I thought the maxim caveat emptor would (and should) always apply, but people have more and more of a sense of entitlement, and legislation does little to assuage that view, (bailing out banks, the Iceland savers, the over-borrowed). People expect to be held less accountable for their own actions.
And so there they go. The Great Undoshed. Don’t be one of them. Do your due diligence. To use a sports analogy, which some seem keen to do these days: mate, you’ve missed completely, didn’t you practise? I know very little about sports incidentally. The moral of the story (not that there always has to be one): you snooze: you lose. Own it!
Until next time,