Like cricketers, investors should be wary of feelings trumping facts

For any readers who have been pining for cricket during the lockdown, here is a piece we published in September 2019 that was inspired by England’s series-tying win over Australia at The Oval


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

England’s win over Australia at The Oval this weekend, which ensured the first drawn Ashes series in almost 50 years, brought the curtain down on a scintillating summer of international cricket. Ever the contrarians, however, here on The Value Perspective, we will not focus on the action – as we did when England were crowned World Champions in July – but on what Australians consider the unluckiest number in cricket: 87.

The subject has cropped up a few times on BBC Radio’s Test Match Special over the summer – most recently during England’s second innings on Saturday when wickets fell not only with the score on 87 but on 222 also. Any multiple of 111 – known as ‘Nelson’ for reasons that stand only two-thirds scrutiny from a historical and anatomical perspective (one eye, one arm) – is traditionally viewed with suspicion in English cricket.

So why does 87 provoke similar trepidation among Australian cricketers? The general feeling among the Test Match Special commentators was that it is because 87 is 13 shy of 100 – simple as that. Our ears really pricked up, however, when TMS scorer and statistician extraordinaire Andrew Samson pointed out that, in well over 100 years of Test match history, more Australian batsmen had been dismissed on 86 or 88 than 87.

Psychologically, that might perhaps be explained by batsmen becoming overly nervous as they approach 87 and relaxing too much as they pass it but the fact remains that, when you analyse the underlying numbers, the superstition surrounding the so-called ‘Devil’s number’ does not stand up to scrutiny. And, of course, the risk of feelings trumping hard data is something investors must guard against every bit as much as batsmen.

This is something we are only too aware of, here on The Value Perspective – after all, it is our job to follow a strategy where well over 100 years of investment history is pointing us towards stocks the wider market is, for emotional reasons (largely fear), going out of its way to avoid. Awareness is one thing but, as the following story illustrates, we constantly need to monitor our own, all too human, instincts.

As discussed in pieces such as One investment edge is good but four are better, The Value Perspective maintains an archive of all the businesses the team has analysed in detail since 2014. It now contains our thoughts on more than 600 businesses, including calculations of what we believe to be a fair valuation and thus a suitably attractive ‘target price’ at which to buy in.

The idea is that these profiles are sitting and waiting in our database should, at any point and for whatever reason, a company’s share price happen to drop significantly. At that moment, we can dust down our existing analysis, update it for the new news and immediately be ready to go to work – and, what is more, this archive is only becoming more powerful with time.

Over the summer, we carried out an audit of our archive in order to test a feeling (we told you we were human) that had begun to be voiced within the team. This was that, when we put together a financial model of how a business might perform under particular future scenarios, we were much better at forecasting a company’s margins than we were its sales.

If an ailing business is going to bounce back, then more often than not it is going to have to take a long, hard look at how it makes money. The company might, for example, enjoy £100m of sales but, if £20m of those sales are not generating any profits, it could choose to exit that part of the business – closing down the relevant division or whatever it may be.

As a result, the sales number will take a step backwards and yet, with that new base, the company has retreated to a core on which it can enjoy improved profitability and margins. And our feeling – our perception – was that we had been calling the margins right but the sales numbers wrong because we were not being aggressive enough in that part of our financial models.

We will spare you the numbers but our audit of the archive revealed we were actually significantly better at forecasting sales, and rather less good at forecasting margins, than we had imagined. All of which goes to show that, no matter how much you strive to take emotions out of investing, you are always hostage to instincts, feelings and perceptions that hard data can show to be totally wrong.

On which note, it seems appropriate to end with a story we came across a few times as we tried to establish if there was any more interesting reason Australian cricketers are wary of the number 87. According to this article, among others, it may actually stem from an observation by the great Australian all-rounder Keith Miller when he played in a game where somebody was out for 87.

Miller recalled how, as a 10-year-old, he had once attended a game where batting legend Don Bradman had uncharacteristically been bowled on 87 and, from that point on, he and his team-mates started taking closer note when batsmen and teams approached that score – a practice, incidentally, that regular visitors to The Value Perspective will recognise as the behavioural finance sin of confirmation bias.

The story goes that the idea so caught the imagination of the Australian cricketing community that Miller was eventually prompted to revisit the scorebook of the game he saw as a boy – only to find that Bradman had actually been bowled for 89. So does this anecdote about a misperception have any basis in fact? It is hard to say for sure – appropriately enough for the origins of a superstition that is anyway disproved by data.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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