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Alchemists could have settled for the glittering prize of a value strategy

13/12/2016

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

Depending on your frame of cultural reference, the pursuit of alchemy – the desire to transmute matter, find a universal elixir and, most famously, turn base metal into gold – might call to mind the shady characters of Ben Johnson’s 17th Century play, The Alchemist, or perhaps Lord Percy who, “after literally an hour’s ceaseless searching” was able to unveil to his friend Lord Blackadder “a nugget of purest green”.                                                                  

Two names you are less likely to associate with the practice, however, are Sir Isaac Newton and Robert Boyle. And yet, when they were not formulating the laws of gravity and gasses and generally helping to lay down the foundations of modern maths and science, these two widely renowned bastions of rational thought were very keen alchemists.

Boyle was so keen in fact he bankrolled his pursuit of the secrets of alchemy by selling off a very significant portion of his personal wealth – not just high-end domestic goods such as clocks and luxurious fabrics, but also items such as telescopes and microscopes, for which, given how he eventually made his name, you might imagine he would have greater use.

Now, if you are wondering why these two great men of science might expend so much of their time, energy and money on something that is hardly by 17th Century standards – let alone today’s – considered to be terribly rational, you have, yes, struck gold. For the question is considered by David Wootton in his book The Invention of Science: A New History of the Scientific Revolution.

One reason Newton, Boyle and other ‘gentlemen of science’ kept trying to turn stuff into gold, he suggests, is it was something people such as them had always done and so they continued their endeavours almost without questioning what they were doing, or why. And as we read the passage, here on The Value Perspective, it struck us that is also a type of behaviour you often see in the market.

There are plenty of investors pursuing actions and ideas that do not work simply because, well, they are ideas and actions plenty of investors have always pursued. To return again to one of our favoured themes, take economic forecasting – or, more precisely, the confidence many people seem willing to place in economic forecasting in the face of all the evidence they might be better off trying something else.

As we recently observed in The future is unknowable: “Consensus failed to call correctly either the result of the EU referendum or that markets would actually move upwards over the following days. And exactly the same thing happened with the US election and its aftermath.” Both times – you could almost say ‘predictably enough’ – the forecasters acknowledged their mistakes before going on to predict what would happen next …

Another reason Dutton suggests Newton, Boyle and the other alchemists kept going was there was essentially no limit to their experiments. When one attempt failed, their instinct was always to think they had not done things correctly – rather than to step back, challenge the basic idea of what they were doing and perhaps conclude there were better avenues for their time and talents than this whole alchemy business.

Again, this is something you come across a lot in the market. To pick on technical analysis this time, rather than ever countenancing the whole idea might be flawed and deciding to move on, its practitioners tell themselves they simply did not see the ‘double bottom’ or they were just a little bit too early or late. And then they dust themselves down, take a deep breath and set about getting it ‘right’ the next time.

The final reason Dutton offers as to why Newton and Boyle practised alchemy is that everyone has emotional and behavioural blind spots – in other words, there is no such thing as a wholly rational or irrational person, only a person who does rational or irrational things. So just because one, albeit rather significant, part of their life was dictated by reason, it in no way meant that had to be the case in everything else they did.

As an extreme example, Dutton highlights two books written by the 16th Century jurist and legal expert Jean Bodin. His 1566 work Method for the Easy Comprehension of History was considered at the time to be the founding text of modern historical and logical reasoning. In contrast, his 1580 book, The Demon Mania of Witches, which took in the metamorphosis of humans into wolves, really wasn’t.

Returning to Newton and Boyle, if two of the leading lights of Europe’s Age of Enlightenment reckoned it made sense to have secondary careers in alchemy, then it should go without saying that investors of all kinds can also be prone to their own bouts of irrationality. As such, a system such as value that seeks to remove the emotional biases from investing could almost be said to be worth its weight in, well, not purest green.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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