End of story – Investors need to focus on a number of factors but ‘narrative’ is not one them


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

If Albert Einstein did not get the maths, what chance does anyone else stand? Well, in this particular instance and if you follow the lead of The Value Perspective, more than you might think. Driving home for Christmas, I was listening to a radio 4 programme called Maths and magic, which included a piece on “the coin trick that fooled Einstein”. Before reading on, if you like, you can watch it here.

Did you see through it? The trick involves someone telling you they know how much change you have in your pocket and then going through a complicated spiel that effectively says the amount of change in their own pocket will match your own amount plus 50 cents, with the amount left over being enough to bring your change up to a total of $2.35.

No matter how wordy the trick becomes, the key phrasing that needs to be weaved into the patter is “I have as much change as you plus two extra quarters and then enough left over to bring your total to $2.35” because what that – and the trick – boils down to is “I have $2.85 in my pocket and, if I take off 50 cents, it leaves $2.35.”

Presumably Einstein, who is said to have been fooled by this not once but twice in quick succession, would have found that a bit easier to work out – if you  need a further nudge yourself, just go through it again pretending you have no change in your pocket. Einstein had assumed some sophisticated maths was at work when in fact the accompanying spiel had obscured the equation ‘$2.35 + x – x = $2.35’.

All of which is a neat illustration of the dangers of a narrative. Most human beings love a story and yet any narrative about why something is or behaves in a certain way is likely to distract our attention from the bare facts. Clearly this can be an issue when it comes to investing and it is not something from which the value perspective is entirely immune.

If it was down to us, of course, we would steer entirely clear of narrative but investors tend to be conditioned to want to hear about investments in a certain way and, up to a point, we tend to oblige them. We do not talk about macroeconomic forecasts for the simple reason we do not have any so that leaves us discussing individual stocks.

So we might talk, for example, about a business in the context of the M&A activity going on in its sector and, while this particular narrative would not be misleading, it would also be no more or less likely than anyone else’s take on the stock’s prospects. Here on The Value Perspective, we are under no illusions there is anything special about our version of the future compared with the next person’s.

The snag with our offering a narrative is we are only highlighting one version of the future when of course we have no idea whether or not it is the one that is going play out. This presents the risk that we become psychologically attached to our prediction, which could cloud the interpretation of new and inconvenient facts. There is also a danger that we give the impression to investors that in order to own a stock we need it to have some sort of underlying story– but that is very much not the case.

We own plenty of stocks where we have no narrative and we are fine with that because we know there are far more important things on which to focus – most notably, undervalued businesses with strong balance sheets, decent track records of producing earnings and free cash flow, and management teams with a solid history of sensible cash allocation. Some of these companies will have narratives, others will not but, if you buy enough of them, then on average you should do very nicely. End of story.


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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