Hard as we find it to believe, here on The Value Perspective, not everybody is a fan of value investing. From time to time, its detractors are prone to wonder what relevance such a long-established and essentially straightforward investment strategy can possibly have in a world that is ever more fast-moving, technological and complicated.
One answer could be found within an ongoing set of psychological studies that originated in Stanford University in the US in the 1960s with an experiment, developed by Professor Walter Mischel, now widely known as ‘The Marshmallow Test’. Aiming to assess the willpower of four-year-olds, it involved a researcher leaving a sweet on the table within the reach of a child and then saying they were going to leave the room.
At this point, the child was offered a choice – they could ring a bell and the researcher would immediately return, at which time they would be allowed eat the sweet. Alternatively, they could wait until the researcher chose to return after a delay and they would instead receive two sweets as a reward for waiting.
Years later, however, the experiment took on a whole new dimension when Mischel tracked down a number of the children to see if his test might be used to predict any outcomes. Starting in 1981 and continuing for some years after that, Mischel followed the children and found a noticeable correlation between their self-restraint or ability to delay gratification – the times they had been able to wait before succumbing to the temptation of the marshmallow at the age of four – and later academic success.
Fast forward two decades and US behavioural and developmental psychologist Angela Duckworth delved deeper. According to this article on the Farnam street blog, she was “interested in answering the question behind Mischel’s original premise – if you want to maximise your self-control, which tricks and strategies are most effective? and, if you can determine those things, can they be taught?”
Duckworth and her colleagues tested two age groups of child – asking four-year-olds to wait seven minutes and 10-year-olds half an hour in order to be able to double up on a sweet of their choice. a little over two-fifths of the 10-year-olds found they could not wait for the larger reward and so ended the test early.
Following up on the test subjects five years later, Duckworth’s study found, among other things, that the children who had done poorly in the self-control experiment had grown up to be more likely to indulge in what she characterised as “risky behaviour” – for example, riding a motorcycle without a helmet, smoking marijuana, or stealing.
What about in later life? Well, around the same time Duckworth was conducting her studies, Mischel was revisiting his former test subjects to see how their ability to delay gratification was faring 40 years on. Marshmallows holding less of an appeal for most adults, he had to adapt his tests but he found those who were less able to control themselves aged four, also showed less self-restraint at 44.
Taken together, these studies suggest the ability (or not) to exercise self-control persists into adulthood and a significant proportion of the population falls into that ‘not’ camp – and it is this prevalent inability to pass up a short-term, lesser gain that may tell us something about why value investing should continue to work.
In a world where access to information is instantaneous – where, for example, a company called Skybox imaging now offers real-time analysis of spy-satellite images so investors can assess oil-bunker stock levels – it becomes ever harder for a large group of people to delay their gratification in return for a bigger but uncertain future reward.
Now, we mentioned strategies and tricks for maximising self-control and, in the course of their research, the psychologists also found that children who were encouraged to think more abstractly about the marshmallow – as a fluffy cloud, say, or inside a picture frame – were able to put off eating it far longer than those who only saw it as a yummy treat.
To translate that into investment terms, the trick to suppressing your inner child would be to think less about the single marshmallow of share price growth (paying little attention to market moves, media bulletins and other short-term ‘noise’ would help) and to focus instead on the more fundamental aspects of a business and how those can help it grow shareholder value over time – in other words, what we do as a matter of course here on The Value Perspective.