For the best - Why a value strategy should not set time limits on its investments paying off
he Value Perspective is grateful to fellow-blog The Brooklyn Investor for reminding us of a passage from the excellent business book Good to great by Jim Collins. This passage concerns what Collins names the ‘Stockdale Paradox’ after Admiral James Stockdale, a US pilot who was held for eight years as a POW in the notorious ‘Hanoi Hilton’ prison camp after being shot down during the Vietnam War.
Tortured more than 20 times, Stockdale did eventually make it home whereas a number of his fellow prisoners of war did not survive to do so. When Collins interviewed Stockdale for his book and asked what sort of people did not make it, he received the unexpected reply: “Oh that’s easy – the optimists.” This confused Collins because he had assumed only an optimist could survive so extreme a situation.
Furthermore, he had taken it for granted that Stockdale was an optimist as he had earlier told him he had “never lost faith in the end of the story”. Stockdale clarified his point by saying: “The optimists. Oh, they were the ones who said, ‘We're going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they'd say, ‘We're going to be out by Easter.’
“And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.” The crucial lesson here, Stockdale believed, was “you must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be”.
Without wishing in any way to trivialise Stockdale’s experiences or those of his fellow prisoners, this idea strikes a real chord with The Value Perspective because, of course, an integral part of a value investing strategy is the faith that, if you buy businesses at cheap enough prices, then your portfolio will eventually do well.
What you absolutely cannot do as a value investor, however, is to count on whatever mispriced asset you have just bought coming good by Christmas or Easter or whenever. Collins went on to define the Stockdale Paradox as: “Retain faith that you will prevail in the end, regardless of the difficulties AND at the same time confront the most brutal facts of your current reality, whatever they might be.”
Here on The Value Perspective, when we make an investment, we do not know when it will work out – nor, if we are honest, do we know for sure if it will work out. What we do know though, is that, if we are consistent in our approach and retain our faith in the strategy, then our investments will work out on average. And as long as we are able to confront that brutal fact of our constant investment reality, we are confident our portfolios will prevail in the end.
Fund Manager, Equity Value
I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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