This article is co-authored by Shankar Sharma and Devina Mehra
We were having a chat with a Family Office Head the other day. He has large sums invested with us, in India and across the world.
At the end of half an hour, spent discussing the entire Investment landscape, he said, "It's clear that you own some amazing companies in your portfolios: Alkyl Amines, Navin Fluorine, Reliance, Muthoot, Thermo Fisher, Shopify, Logitech, LSE, JD, etcetera. How come I have not heard you speak lyrically, poetically about even one of them?
"How come you have been very clinical, neutral, almost detached about these companies, these countries, rather than give me ‘stories’ like how great these managements are; how the businesses have strong moats and will remain great almost forever, etc. That's the way every other fund manager I know speaks about their holdings."
Pretty interesting observation, we thought.
Indeed, why are we so clinical about Investing?
The real question you should ask is: why do human beings tend to "storify" their holdings or their views in general?
"Human beings aren't rational animals; we're rationalising animals who want to appear reasonable to ourselves," said famous social scientist Elliot Aronson, author of The Social Animal.
As human beings and in particular, social beings, we use stories to make sense of the world.
Remember a famous election?
There was little or no hard evidence or articulated strategy about how a country's problems of declining capital Investments would be solved.
It was simply a story, well told, well sold, that captured the imagination.
Data, facts, and logic didn't matter because most humans are simply incapable of acting on these.
The world is about tons of data, which, at times, can take random directions. The world is about future probabilities, not certainties...yet the human mind wants a clear cause-effect-future path.
In other words, the world wants a story.
This affinity for stories shows up not just in our day-to-day lives and not just among laypeople, but also professional investment managers.
The interesting thing is that with greater amounts of data being available, the need to "storify" has increased even more.
This is because human beings are now deluged with tons of just data, which is essentially unmanageable for them. And which they are completely incapable of analysing in a coherent, unbiased and neutral manner.
It is at this point that the human mind starts taking refuge in building lazy, under-analysed, over-simplified opinions.
When a fund manager has long and perfect sounding arguments to justify why a company will go on doing well forever and why a particular management has a magic touch, it is almost always lazy opinions at work, with no room for any other interpretation.
So, why a strategy based on “storification” and “high conviction” stocks hugely risky for the investor?
Because when
- A fund manager gives his/ her holdings a rose-tinted future, in which the only thing that is visible is a straight, long road of eternal growth, something that is known as consistent compounding
- Ignores discordant, inconvenient elements (industry cycle, favourable policy, plain luck)
- Speaks and writes publicly of their high conviction in these companies
- When they are that deeply committed to these carefully edited, well-massaged stories,
Then
- They cannot detach themselves from their attachment, even when the road ahead gets rocky, ie when the facts change.
Love in investing is dangerous.
This is exactly what happened with Warren Buffett and his Coca-Cola holdings. He should have sold this stock several years before he actually did.
The data is brutal.
Coke has been a rabid underperformer since 1993.
In fact, Buffett should have bought Pepsi instead of Coke.
Why couldn't he pull the trigger?
Because he had storified the stock and its management massively and publicly.
In India, you would have heard the talk that you cannot go wrong buying “blue chips” or consumer stocks with strong brands, moats & cash flows that are predictable for decades?
This story is seductive.
And untrue.
Ever heard of Gillette India, ITC, and Colgate?
They used to be part of this list of storied, branded consumer companies.
Till their stories went sour.
And very quietly, they went out of the list of these so-called compounders.
This is what is called building a story around the survivors, or survivorship bias.
As Bill Gates said when Steve Jobs died, "Steve and I will always get more credit than we deserve because otherwise, the story gets too complicated.”
Which brings us to the next point.
Should you dismiss a story only when it is based on no facts at all? Actually, the really dangerous stories are the ones that are true in one tiny part, where there is a small bit of truth but that is used to build a whole edifice that floats around in the ether--exemplifying oversimplified, lazy opinions.
As Morgan Housel writes, "...something that’s true but incomplete might be more dangerous than something that’s wrong because a little truth is fuel for a lot of overconfidence."
In the real world, particularly, in markets, things ARE complicated.
But the human mind cannot handle very complicated narratives.
In investing there are always known unknowns. Fashion changes, health trends (eg against sugary drinks), new product disruptions, policy. The list is endless.
Things are rarely linear in real life for a large basket of companies. But they will always appear to be linear for the company selected with complete hindsight or a selection of the survivors.
And based on these survivors, a vision of the future is painted in which absolutely everything is perfect and as clear as a COVID-period sky.
Reality is that beyond a point nobody knows anything about anything.
Neither company management, nor fund managers, have any clue about what happens a few months down, let alone years.
All this means that the key to being a good investor is being alert and flexible rather than being married to a story you have built up in your mind.
And falling in love with it.
One of the central pillars to being a successful investor is to be extremely flexible in one's thinking.
This has been one of our guiding principles of investment at First Global.
We bought Amazon in 2001. And we continue to hold a portion of it even now.
We bought Shopify in 2016. It's up 40x since.
But never ever in that 40x-300x journey, have we ever storified, glorified Jeff Bezos or Tobias Lutke.
In our framework, they are mere mortals, enjoying a great run.
They can and will stumble. Or business circumstances will change.
And we won't have Amazon or Shopify then.
That's the First Global Investment Method.
We follow the data. Never the mortal human.
And that is why we never talked any stories with that gentleman, the other day.
(The authors are founders of First Global, a global asset management and securities firm.)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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