This month saw stuntman Felix Baumgartner freefall 24 miles from the edge of space, breaking the speed of sound with his own body – and a YouTube viewing record into the bargain. All things considered, it’s worked out pretty well for him and indeed for his sponsor Red Bull, which has since been hailed for the support it gave, and the millions of pounds of free advertising it has since received.
Still, you only have to start thinking about all the things that could have gone wrong with the stunt to realise it could, of course, have ended a good deal less triumphantly for all concerned. A faulty heater meant Baumgartner’s visor fogged up – although he decided to jump anyway – and, when he did, he almost span out of control on the way down. Then there was the small matter of nobody having any idea what effects breaking the speed of sound in this way could have on the human body.
Understandably enough, Baumgartner and his team had identified all these risks, and more, in advance and had taken steps to mitigate them – for example, with the special drogue parachute the stuntman could have activated if he had spun too wildly out of control. If he had, he would not have broken the speed of sound and he would not have been as famous as he is today but he would be alive.
So Baumgartner had a goal, knew there were some considerable risks involved, went ahead anyway and achieved what he wanted to do. Now people are, with good cause, in awe of the idea, the vision and the success of everyone involved, but let’s focus on two important aspects of that awe – it stems from the stunt being a success and it has only come about after the event.
The benefit of hindsight has allowed people to marvel at Baumgartner’s bravery and the visionary nature of Red Bull’s sponsorship. They can look back now and say what a great idea it was – they might even suggest what an obvious idea it was – but the reality is these things always look a whole lot easier in retrospect.
You may well have worked out where this is going but it is much the same in the world of investment. People look back at one decision or another and say what a no-brainer it was to invest in, say, the underappreciated Rio Tinto in 2004 ahead of the biggest commodities bubble in history or to buy lowly-valued tobacco stocks in 2000 just before the technology crash. But that sort of decision is never a no-brainer at the time – flying in the face of overwhelming consensus always feels incredibly risky.
As value investors when we buy or sell we are trying, much like Felix Baumgartner, to reduce the associated risks. So continually looking at cheaper stocks means we are less likely to get hurt and investing in businesses with stronger balance sheets is the equivalent of our ‘drone’ chute – it should slow down any falls. True, we might not make as much money as we would if we had geared up the investment but we should still make money and we will live to do it all again another day.
Many people will, with hindsight, claim an ultimately successful decision by a value investor was incredibly obvious but these things are never obvious at the time. There is always a compelling reason not to do it but, in the end, you just have to step off the edge.