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Balancing risk and reward is a constant battle – with Nics Wetherill

People may instinctively look at decisions in isolation but, as our podcast guest Major Nics Wetherill illustrates, whether you are a polar explorer or a portfolio investor, risk must be constantly traded off against reward

24/03/2020

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

‘Imagine the worst and make it worse still’ may sound like an extreme version of the ‘margin of safety’ strategy adopted by value investors but, given the line referred to training for the Ice Maiden expedition – which in early 2018 saw six serving members of the British Army and Army Reserve become the first all-female team to ski coast-to-coast across Antarctica by muscle power alone – ‘extreme’ was very much the order of the day.

When Benjamin Graham first described the secret of a sound investment as a “margin of safety”, he meant the price you pay for any investment should be cheap enough to allow for a range of unexpected adverse outcomes. The father of value investing also took the view that “the purpose of the margin of safety is to render the forecast unnecessary”.

In effect, this is what the Ice Maiden team – including Major Nics Wetherill and Lance Sergeant Sophie Montagne, our guests on the following episode of The Value Perspective podcast – were doing as they prepared for their 1,000-mile trek. And, given the theme of our podcast is decision-making at times of uncertainty, it seemed appropriate to ask how they set about preparing for the highly unforecastable Antarctic conditions.

“The weather over 75 days in possibly the most unpredictable continent on earth was a challenge,” Wetherill says, with a degree of understatement. “None of us had been to Antarctica before but we did loads of research to try and understand the kind of risks we would face – particularly with the weather. Obviously, it was going to be cold and it was likely to be stormy so what we did was imagine the worst and then try to make it harder.”

In an echo of the classic value investing strategy of building a ‘margin of safety’ into portfolios, the team adopted what Wetherill calls the ‘train hard, fight easy’ approach. “This meant that, when we went to train in Norway, we went at the worst possible time,” she explains. “We made it as miserable as possible – mainly so that, if we could cope with that, we would hope we would be able to cope with Antarctica.”

To illustrate her point, Wetherill picks out an incident from just the second day of the expedition. “We had been held up so there was already a bit of pressure on the team to actually get moving and cross this continent,” she says. “We set off in the morning, the wind started picking up and visibility grew worse and worse. I remember Sophie’s pulk [a sled pulled by a skier] actually getting being picked up by the wind and dumped on the ground.

“Bearing in mind these pulks were about 80 kilos ... I just thought, OK, this wind is pretty strong now. I remember everyone turning to me and thinking, they are looking at me to make a decision on what to do next. That is when the words of my grandfather came back to me – that making a decision will at least lead you somewhere but not making a decision will lead you nowhere.”

The decision facing Wetherill was whether the team stopped, put up their tents and took shelter – thereby risking this life-saving equipment being shredded to pieces – or carried on in the hope the Antarctic winds would blow through, as they can often do. “In the end, you have got to make a decision and just go with it,” says Wetherill. “Whatever happens, once you have made that decision, you are then able to deal with the consequences.”

She opted for safety – to take shelter – but should the team put up one tent or all three? “I decided, let’s put up one between all six of us and, if that gets shredded, I’ll reassess the situation,” Wetherill continues. “But it was fine and, actually, it turned out to be the best decision – when we got in touch with the weather station, they told us to batten down the hatches as it was only going to get worse. In the end, we were sat there for two days.”

As well as graphically highlighting the team’s bravery and powers of endurance, the story neatly illustrates an often-overlooked aspect of risk – that it is a continuum rather than a single decision. People may instinctively look at decisions in isolation – assessing if the risk facing them is a ‘good’ one or a ‘bad’ one – but, whether you are polar explorer or portfolio investor, the reality is you are constantly trading off risk against reward.

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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