“Fools say they learn by experience. I prefer to profit by others’ experience.” - Otto von Bismarck
Much is made in investment of the number of years a fund manager has on the clock and, up to a point, you can see why. Given the choice of someone on their first day in fund management looking after their portfolio or someone who has experienced the slings and arrows of a couple of stockmarket cycles, understandably enough, most people are going to pick the latter.
Equally understandably, most fund managers wear their years of experiences as a badge of honour and, until recently, I admit I too had been inclined to accept the perceived benefits of decades of investment practice. That is not to suggest this in any way caused me to ignore my value investing fundamentals – just that I assumed 30 or 40 years in fund management would teach you so much.
Add in the fact that the majority of fund managers actually have relatively little experience – in Your starter for tenure, for example, we highlighted data that showed fewer than half (47%) of managers had been in charge of their portfolio for five years and just 1% for 20 years – and you would imagine the older generation would be streets ahead, yes? Well, I am no longer so sure.
As I pass my first decade at Schroders, I am coming to terms with an awareness of how little I have actually learned about investment through direct experience – and how little this is going to change after another five, 10 or 20 orbits around the sun. The seed of this depressing yet ultimately promising realisation was planted as I read Why Don’t We Learn from History? by soldier and military historian Sir Basil Liddell Hart.
Noting the above quote from Prussian statesman Otto von Bismarck, Liddell Hart goes on to describe a common error of perspective – that is, the way some cultures “regard age with veneration, and hold that a man of 80 years or more must be wiser than others”. “But 80 is nothing for a student of history,” he continues. “There is no excuse of anyone who is not illiterate if he is less than 3,000 years old in mind.”
The power of modern computers means that, these days, you could almost multiply that 3,000 years by a factor of a thousand. After all, anyone in fund management with access to a Bloomberg terminal – which is pretty much everyone – can with relative ease dissect the fortunes of the 50,000-odd companies that have fundamental accounting data available to them.
What is more, for many companies there will be decades of data available so that, in effect, a fund manager’s experience and historical perspective can grow by 50,000 ‘stock-years’ per year. Yet, despite this, we know of precious few fund managers who are prepared to pay heed to the battlefield lessons of former investors before they charge out of the trenches.
Here on The Value Perspective, though, we prefer to take our time weighing up the odds before we put our investors’ money in the line of fire. By following the aggregate course of companies over decades we can see the common threads that have led to the profit and loss of other investors. And while companies, sectors, managers and businesses may vary, two common themes frequently emerge.
These are that shareholders make better long-term returns when they pay a low valuation and when they invest in businesses with less debt. All too often these lessons, which hold true across countries, industries and geographies, are forgotten by investment teams who measure their perspectives in mere decades. And we all know what those who cannot remember the lessons of history are condemned to do.
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