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Recognise the crucial distinction between faith and optimism

Value investors never know when or indeed if their investments will work out – only that, if they are disciplined in their approach and retain their faith in the strategy, things should eventually come good

11/04/2019

Simon Adler

Simon Adler

Fund Manager, Equity Value

The ‘Stockdale Paradox’, which appears in Jim Collins’s 2001 business classic Good to Great, is named after Admiral James Stockdale, a US pilot who was later the vice-presidential nominee when Ross Perot ran as an independent candidate in the 1992 US presidential race.

Back in 1965, however, Stockdale was shot down flying a mission during the Vietnam War and was held for almost eight years as a POW in the notorious ‘Hanoi Hilton’ prison camp.

Kept in horrific conditions and routinely tortured, Stockdale did eventually make it home whereas a number of his fellow prisoners of war did not survive to do so.

Asked by Collins what sort of POWs did not survive their ordeal, he answered: “Oh that’s easy – the optimists.” This unexpected reply confused Collins because he had assumed only an optimist could survive so extreme a situation.

What is more, he had taken it for granted Stockdale was himself an optimist as he had earlier told him he had “never lost faith in the end of the story”.

Stockdale went on to clarify this point, however, 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.”

For Stockdale, the crucial lesson here 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.”

Faith and discipline

Without wishing in any way to trivialise Stockdale’s experiences or those of his fellow prisoners of war, this take on faith and discipline really does strike a chord with us, here on The Value Perspective, because an integral part of a value investing strategy is the faith/discipline that, if you buy what you believe to be good businesses at cheap enough prices, then your portfolio will – over time and on average – outperform.

At the same, what you absolutely cannot do as a value investor is count on whatever mispriced asset you have just bought ‘coming good’ by Christmas or Easter or whenever.

Collins went on to define the dual nature of 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, over time and on average, if we are disciplined in our approach and retain our faith in the strategy, then our investments are likely to work out (althouh of course past performance is not a guide to future performance and may not be repeated).

As long as we are able to confront that brutal fact of our constant investment reality, we remain confident our portfolios will prevail in the end.

Author

Simon Adler

Simon Adler

Fund Manager, Equity Value

I joined Schroders in 2008 as an analyst in the UK equity team, ultimately analysing the Media, Transport, Leisure, Chemicals and Utility sectors. In 2014 I moved into a fund management role and have had experience managing Global ESG and Pan-European funds.  I joined the Value investment team in July 2016 to focus on UK institutional and ethical-value portfolios.

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