Blog

In investment it pays to know when to say ‘I don’t know’

Saying ‘I don’t know’ may generally be seen as a sign of weakness but, for investors, owning up on the occasions when you do not know something can ultimately allow for a more objective reflection of the facts.

11/09/2018

Ben Arnold

Ben Arnold

Investment Specialist, Equity Value

This summer, Alastair Campbell did something unforgivable – at least in the eyes of the various media outlets that laid into the former Downing Street press secretary in the days that followed.

In case you missed the story – perhaps you were away or maybe you do not read those elements of the press that found themselves most exercised by Campbell’s offence – let’s briefly recap what happened.

"IDK"

Back in July, Campbell appeared on Sky News to discuss the Government’s latest plans for Brexit and at one point, as he has become accustomed to do, he put the case for a second referendum on the issue.

He was then asked by the interviewer how he would word the question the Great British public would be asked in such a referendum and that was when he committed his crime.

He replied: “I don’t know.”

Over the next day or two, Campbell found himself lambasted across some parts of the media and, while it may or may not be a coincidence that his detractors were largely to be found in the more Brexit-supporting areas of the press, their reaction was certainly well in keeping with society’s broad dislike of those three little words.

Here on The Value Perspective, the episode brought to mind a Freakonomics podcast from 2014, entitled The Three Hardest Words in the English Language.

In it, hosts Stephen Dubner and Steve Levitt explore where people’s unwillingness to admit they do not know something comes from, suggesting it may be a habit acquired in childhood that adults struggle to outgrow – and it can have significant consequences.

Not knowing = weakness?

“Within the business world, there’s a general view that your job is to be an expert – and no matter how much you have to fake or how much you are making it up that you just should give an answer and hope for the best afterwards,” notes Levitt.

“And I have seen it teaching the business school students, that they are incredibly good – the MBAs – at faking like they know the answer when they have no idea.”

Saying ‘I don’t know’ may generally be seen as a sign of weakness but, here on The Value Perspective, we have a different view.

For if you can be honest – with yourself and with your work colleagues – and own up on the occasions when you do not know something, then this can ultimately allow for a more objective reflection of the facts.

That, of course, is precisely what we are striving for in our investment approach when we analyse companies as potential investments and why we always work through our list of seven ‘Red’ questions.

Set out below, these help us to assess both the upside and downside of a business – yet sometimes it may not be possible to reach a definite answer to one of them.

 

Our seven ‘Red’ questions

* Has anything been missed off from the company’s enterprise value?

* Have profits – that is, the company’s net operating profit after tax – been misrepresented?

* Is the company’s past a good guide to its future?

* Do the company’s profits turn into cash?

* Is the company’s balance sheet good enough?

* Is the business itself good enough?

* Are there other risks to consider?

Source: The Value Perspective

 

That does not mean, however, that we cannot make a judgement on the business as an investment – and indeed being willing to say ‘I don’t know’ to something should expose us to less risk than those who feel they have to bluff an answer to everything.

That’s good to know.

Author

Ben Arnold

Ben Arnold

Investment Specialist, Equity Value

Don’t miss the latest value investing ideas.

Enter your email for alerts on new posts from The Value Perspective team.

We store your information securely, and we never share it with third parties. We'll only send you emails relevant to you and you can opt out at any time.

Important Information:

The views and opinions displayed are those of Ian Kelly, Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans and Simon Adler, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated. They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.