The value lesson nestling inside every Christmas cracker

Value is all about comparing what you paid and what you get – and identifying value in different Christmas crackers is no different from doing so in the stockmarket



Kevin Murphy
Co-head Global Value Team

What do you get if you eat Christmas decorations? Tinselitis. How did Darth Vader know what Luke was giving him for Christmas? He had felt his presents. How does Good King Wenceslas like his pizzas? Deep-pan, crisp and even. Given this is the season of goodwill, we will stop there but, over the coming day, jokes like these – some better, some much worse – are likely heading your way, encased in the humble cracker.

Or sometimes not so humble – while a single cracker will cost you £1.67 from Aldi, £1.25 from Marks & Spencer and just 33p from B&M, should you prefer to buy a box from Selfridges, your crackers will work out at £8.33 each. Furnished with that information, what do we know about the various crackers? Absolutely nothing, aside from how much they cost.

The price of a cracker can tell you if it is expensive or cheap but it tells you nothing about whether it is good value or a rip-off (or, in the case of the Aldi variety, contains a small bottle of gin). If the cracker fizzles rather than snaps, the hats rip the moment you try and put them on, the novelty is nothing but plastic landfill and the jokes are of the Tinselitis standard, it does not matter what they cost – they were not good value.

On the other hand, while the Selfridges crackers may cost 25 times as much as the ones from B&M, they could still represent a good deal if the snap is satisfyingly loud, the hats are elaborate, hard-wearing and fit properly, the novelty comes from Tiffany’s and the jokes are as excellent as the one about Good King Wenceslas’s pizza preferences.

Subjective view

Value is all about comparing what you paid and what you get and identifying value in Christmas crackers is no different from doing so in the stockmarket or any other walk of life. Herein, though lies the problem – just as you might actually have preferred the Tinselitis joke to the Good King Wenceslas one, value can be subjective.

And so two people can look at the Selfridges crackers, compare the price with what they actually receive for the money they pay – and come to very different conclusions on whether or not they represent good value. It is the same when you invest except that, with companies, what you have bought is not revealed immediately (or once you have found it on the floor under the table) but reveals itself slowly over the time you own it.

These days, an investor’s view of whether or not a company is good value will often be based on their subjective take on what will happen in the future – which is a tactful way of saying it is a guess. And when it comes to the stockmarket, subjective views of value, based on guesses of what might happen in the future, can be a recipe for huge disappointment.

Pay attention

After all, if a decade or so that began with the fall-out from the global financial crisis – and has since taken in Brexit, the election of Donald Trump and the Covid-19 pandemic – has not taught us that humans are terrible at forecasting, then we have not been paying attention. This is why, here at The Value Perspective, we build our entire approach to investing on the foundation stone of objective value.

We acknowledge at the outset that we cannot know with any certainty what the future holds so instead, when looking at a business, we dig forensically into what it has done in the past. We want to know all we can about the assets it already has; what the management team has previously done; and the profits the company has already shown it can make.

What is more, we want to know whether the company’s balance sheet and funding structure can protect us against an unknowable future. Is the balance sheet strong enough today? Is it strong enough should profits come under pressure from some unknowable event? And, if the consensus view of the future is dashed, will the company be able to survive?

This focus on objective value and balance sheet protection is rarely followed in the stockmarket today but it does provide investors with a much more solid grounding, enabling a better appraisal of whether what looks cheap also equates to good value. And, given today’s theme, it is obligatory we end by saying that, here on The Value Perspective, we consider this approach to investing to be a real cracker. Boom, boom.


Kevin Murphy
Co-head Global Value Team


Behavioural finance
The Value Perspective
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