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Focus on what matters in investment – and be wary of experts who don’t

04/11/2016

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

The sort of temporal manipulation that allowed us an extra hour in bed this weekend pales in comparison to what happened in Britain in 1752. That was the year the country switched from using the so-called Julian Calendar, which dates back to Julius Caesar’s time, to the Gregorian Calendar introduced by Pope Gregory XIII in 1582 and gradually adopted around much of the world over the following centuries.

The details of the switch in Britain and the wider British Empire, which then included what is now the eastern part of the US, are fascinating, if a little disorienting. As it was necessary to make a correction of 11 days, Wednesday 2 September 1752 was immediately followed by Thursday 14 September 1752. A further change saw the end of the year falling for the first time on – bear with us – 31 December.                                                                               

Yes, up to that point, the last day of the year in England and Wales – Scotland having already made this change in 1600 – had been 24 March, with the first day of the new year being 25 March. To make all this work, 1751 was actually a short year of 282 days, running from 25 March to 31 December, and then 1752 began on 1 January. Having lost 11 days, of course, 1752 was also a short (leap) year – this time of 355 days.

Fascinating, as we said, but why another history lesson from The Value Perspective? Well, while all these changes initially appear dramatic, when you think about it they are actually pretty superficial. Yes, the names of days changed but nobody in the country grew any older or younger as a result and – aside from a number of children presumably feeling quite miffed to have missed out on a birthday – nobody was really affected.

Ultimately people just decided to measure time in a slightly different way, which – as we have noted before in articles such as Beating consensus – has some resonance with the investment world at this point in the year. For it is around the time the clocks go back that sell-side analysts tend to tire of looking into 2017 from 2016 and start thinking about how 2018 might be shaping up.

So they roll forward their forecasts to become 2018 vintages rather than 2017 and, because analysts are inherently upbeat souls who tend to have growth built into their models – as we also noted in Beating consensus, they have been shown on average to be 12% too optimistic in their earnings predictions – this normally means this is the season when target prices are rolled upwards too.

Much like 1752, nothing has really changed aside from a decision to look at time in a slightly different way. The businesses under consideration are exactly the same – they are engaged in the same industries, facing the same conditions and have the same sort of debt as the day before – but at some point around now analysts wake up, get out of bed and roll their models forward a year.

And for no other reason than that, their forecasts will change – and so will the views of those in the market who set such store by analyst pronouncements. Here on The Value Perspective, of course, we prefer to conduct our own company research and, when we do, we focus on what is important – the strength of a business’s balance sheet and how much debt it has. And we do that regardless of the date on our calendar.

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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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