The Value Perspective Podcast episode – Making decisions before Russia invaded Ukraine

Hi, everyone. This week on The Value Perspective podcast, we have a really interesting pair of guests – Steve Gorelik, head of research at Firebird Management, and Rollo Roscow, head of EMEA at Schroders, who you may well remember from our episode with Sam Sithole and Anthony Ball of Value Capital Partners. Both are professional investors who specialise in the Eastern European region and they join Juan today to discuss how they made decisions in the weeks before 24 February 2022, when Russia invaded Ukraine. Their conversation takes in how they sourced and processed different information feeds; how they worked with their teams in understanding and reacting to the rapidly unfolding events; and how they have been processing the humanitarian impact of the conflict in a region in which they have worked for many decades. We hope you find this session as absorbing as we did during this time of crisis. Enjoy!


Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value


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Chapter headings for Rollo Roscow and Steve Gorelik on The Value Perspective Podcast

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* Rollo Roscow and Steve Gorelik, welcome ...

* Assessing the chances of invasion

* Making sense of percentage probabilities

* Acknowledging the ‘irrationality element’

* Balancing the influence of subjective experience

* Judge decisions by process not outcome

JTR: Rollo Roscow, Steve Gorelik – welcome to The Value Perspective podcast. It is a pleasure to have you here. How are you?

RR: Very well, thank you.

SG: Very well, thanks. Good to be here.

JTR: The genesis of this meeting is – unfortunately – Russia’s decision to invade Ukraine back in February. Back then, I had the opportunity to sit down with you guys and two other investors in a pub. The invasion had just happened and, while you are all investors in Russia and Eastern Europe, I believe you guys had never met before. Still, over a pint, you ended up talking about how you were thinking about decision-making in the six weeks prior to the invasion. I thought that was a really interesting– and important – conversation and now we are looking to recreate some of it. Before we do, though, could you please give us a little bit of background about yourself? I’ll start with you, Rollo ...

RR: Thanks for the intro, Juan – and obviously having us on today. My name is Rollo Roscow and I work at Schroders as head of the EMEA department. Until recently, the main focus of that was investing in Russia – along with all the Eastern European countries – but Russia has been my main focus for the last eight years. So really that meant getting to grips with the listed equities there – the businesses and the movers and shakers within the market, whether that be the owners or on the political scene as well. So it has been a fascinating journey, obviously, over those years and I am grateful to have been able to make it.

JTR: And Steve, could you please introduce yourself?

SG: Sure – and thank you, Juan. My name is Steve Gorelik and I am head of research and a portfolio manager at Firebird Management. The firm has been around since 1994 and we are best known for investing in Eastern Europe. We started out by investing in Russian privatisations back when the whole economy was valued at anywhere between $5bn and $10bn – but we went on to become one of the first portfolio investors in the Baltic countries, Kazakhstan, Georgia and Romania. Now we pretty much look at all of Eastern Europe as our investment region. I have been with the firm for ... it is hard to believe but I think it is 17 years! It has been a blast and there is never a dull moment.

Assessing the chances of invasion

JTR: I can certainly believe that! I want to start by returning to something you mentioned that time in the pub. You were saying you had been reading Annie Duke and, as it happens, this podcast started after we interviewed Annie about her first book, Thinking in Bets, for The Value Perspective blog. Everything she said was so interesting and so relevant for investors, we thought there had to be something we could do on decision-making as it applied to the world of investing. Another thing you mentioned was that, as head of research, in the weeks prior to the invasion, you were individually emailing your team of analysts and asking each of them for their own assessment of the chances of Russia invading Ukraine. And, while the average likelihood rose as the weeks went by, it started very low and, the week of the actual invasion, was not very high at all. Is that correct?

SG: Absolutely – and I do want to start by saying the book you mentioned, Thinking in Bets, is probably one of the better books out there. It is important to read for anybody – no matter what industry you are in – if you have to make decisions. The questions Annie is asking and the reminders to ask how confident you are something will happen – as opposed to just yes or no – that is a very important lesson I am trying to teach to my kids on a daily basis. Sometimes failing, sometimes succeeding!

But, Juan, you are absolutely right. We don’t have a large investment team – just five people – but, in the time leading up to the Russian invasion of Ukraine, we were asking the question of how likely it was to happen. Because the situation started developing ... Rollo, correct me if I am wrong but it was as far back as last summer when Russian troops started building on the border? And you didn’t want to dismiss the situation but you did want to be rational and analytical because there have been a number of times in the past where there was ‘sabre-rattling’ by Russia that ended up being nothing.

Even a couple of years ago, there was a similar situation and then nothing happened. So what we were doing was asking, OK, taking into account all of the information coming in ... and the way our research process works is everybody operates more or less independently but we check in on daily basis – sometimes once, sometimes more than once – and discuss what has been happening. But I didn’t want to be bringing up this question in the group discussion because there is the risk that, if one person says something, an anchoring can happen as a result, where everybody’s answer kind of gravitates towards the same number.

So I was asking the question – how likely do we think the invasion of Ukraine by Russia is to happen? And there were also subsets within that question like what the invasion could look like – because that was also an important part of the decision process. And yes – I don’t remember the exact numbers right now but the average percentage was at first below 10%. We had some people on the investment team who thought it was more likely while some people thought it was less likely.

JTR: And you were using numbers all the time, rather than words?

SG: It was numbers. It was, percentage-wise, what do you think is the likelihood of Russia invading Ukraine in any way, shape or form? As I say, at first, the number was quite low but it did go up. Even the week before the invasion, though, it was maybe a quarter – and we can get into why we didn’t think it was likely but that’s a separate question. Then the second thing we were doing was trying to understand, if it happens, what is the likely reaction of the markets? And, then, could stocks fall by 10%? 50%? 100%?

And the combination of those numbers would give you an expected value – based on what our team was thinking – of how markets would react to certain actions, which you could then compare to what had been happening to the market already. Also, if you can ask similar questions of other investors who are looking at the region, it would also be quite useful because our investment team consists of five people who have been working together for a long time. So it is very hard to avoid ‘group-think’. You can try to do something about separating it out but ‘group-think’ is very hard to avoid. We have worked together for a long time so our opinions are going to be influenced by that.

So that is what we were doing but one mistake – well, I don’t know if you can call it a mistake – one thing we realised in that process is there are a number of uncertainties where you think you can try to figure out the result of a certain outcome but what actually happened was we could not predict at all. So not just the war but, say, the freezing of the central bank reserves. There were certain things that happened after that – as a reaction from the West – that we did not consider because it did not happen in the past. So it is a learning opportunity, of course, but it is also something to think about – always to keep in mind there are things you know, there are ‘known unknowns’ and there are ‘unknown unknowns’. And those are the ones that are going to mess you up.

JTR: And how was it for you, Rollo? I remember we were having discussions days and weeks before the invasion and you were also thinking in probabilities – even if you were not maybe doing that specific exercise, you were assessing the odds based on your experience. Now, previously on this podcast, we had Dominic Mielle, who is a big fan of decision trees, and Nick Kirrage asked her how people can get better at estimating the probability of something happening – and she said, well, based on experience. You both have a lot of experience in this market, which will have informed your assessments and how you were calculating the odds – but how was that process for you, Rollo, in the weeks before the invasion? How were you thinking about that and what type of discussions were you having with your analysts or portfolio managers?

RR: It was a reasonably similar experience to Steve, I think – we have quite a big team here, with a lot of investment professionals who have a lot of experience in volatile emerging markets and trying to assess when it is a good time to pick up assets at cheap prices, when the risk/reward looks at its greatest – to the upside, of course. This is obviously not necessarily a financial decision that is being made, which ties into rationality and rational thought – you know, we think in financial terms because we are investors but this decision relates to a war. So it is an emotive topic for some individuals versus others who are trying to think in financial terms and rationality.

And obviously, you can tie this into game theory as well – what was the purpose of the build-up of the troops on the border? Was it all a negotiating tactic to try and gain concessions with regards to Ukraine and NATO and integration with the EU, which were all thought of as a threat to Russia? So in the lead-up to that – we can try and think in financial terms and in probabilities and I think we initially made the same assessment as most investors in the region did – that there was an extremely low probability of an all-out invasion, an all-out war.

Then, of course, there are other scenarios as well – for example, if there is going to be a war, perhaps it will just be in the eastern part of the country, in the Donbas and Luhansk region where Russia already had influence. So we also thought, well, what is the point of that? There is going to be enormous cost but what are you actually going to achieve by just basically making it official that these regions are now under Russian control? They effectively were anyway.

So when we were thinking about all that, the probabilities did not really change for a long time – even though there was a troop build-up, because there have been troop build-ups before, with exercises on borders and so on. It is a bit like the old adage of economists predicting eight of the last three recessions! A lot of risks come and go and, obviously, trying to filter which are the most important ones to act on is very difficult. And this was an unusual situation because the risks kind of bubbled along and some actors – people who had military experience or perhaps better knowledge than we did, from the US intelligence services, say – made very strong statements that, obviously in hindsight, we should have listened to more.

But the only way we tried to recalibrate our probabilities was by discussing things on a daily basis and coming up with reasoned thought and conclusions on that basis. But it was also listening to people who we thought were experts on the topic – and they tended to be political strategists, who were living in Russia as well as in Western countries; military advisers; and obviously what you read in the press was a great source as well for us. And it was very difficult to shift those probabilities until the final two or three weeks, when risks really did start to rise dramatically.

Making sense of percentage probabilities

JTR: I do want to follow up with a question on rationality but, before that, let’s go back to Steve’s point about the average probability on the Monday before the invasion only being around 25%. What do you make of those numbers? Let’s take the Ukraine invasion out of the equation for a second and revisit a question I put to Annie Duke – there is this anecdote where President Obama is being told by the CIA and a lot of his staff that they think they know where Osama bin Laden is but they are not certain. So he asked every single person around the table for their individual assessment of the probability of bin Laden being in the compound. The percentages, I think, ran from as low as 30% to 90% – and, based on those probabilities, he said he could not make any decision at all – the spread was just too wide and it was a mess. So, in order to improve decision-making, how do you make those numbers meaningful?

SG: It is a great question but, in a way, the first thing you would want to do is take one step back and see if you can make a decision at all. And just like you were describing with President Obama, sometimes you have to be honest with yourself that you cannot make a decision – or you need to be asking a different question. And then maybe you step back and rephrase the question differently – that is something that would help in your example. However, we were in a situation where we couldn’t not ask the question because, as people who invest in Eastern Europe and with Russia being the biggest and most liquid market in our region, we had to ask it.

But with our percentages approach, we were trying to understand how each decision-maker in this process would act and the probabilities from their point of view – what is influencing their decisions? And Rollo will correct me if I’m wrong, but that is part of reason we did not think this was likely – because of the examples Rollo just gave. With anything Russia could do, from a military point of view, the gains were minimal – or seemed like they would be minimal – but the costs would be quite significant and the uncertainties high.

And based on that assessment – not just on what we were seeing on the ground – we were saying the chances of an invasion were not that high. Even almost up until the day of the invasion ... I clearly remember listening to a conversation with a former Ministry of Defence of Ukraine official, three days before the invasion, where he was explaining why it was not going to happen. And he was in Kiev – so, for him, it was almost life or death. We were not there but, for him, this was a decision he had to make, based on where he was and where his family was. And he was still coming up with the same or a similar outcome.

The one takeaway we have from looking back at what was happening is that it seems like we were working with a different set of information from the people who were making the decisions in Russia. At least in the first few days of the conflict and how it went, it was pretty clear Russia assumed they were not going to see any resistance. And if that is your assumption – if you are being been told as a decision-maker that the military cost of the invasion is going to be low – then you will put a very different likelihood on a positive outcome. And that is something that has only come into focus for us after the invasion – not before. I’m not sure if I am answering your question or not but that is what we learned from this process. Still, on how to make a decision better, I think it is really more about asking the right questions.

RR: That is a great point and something I was going to bring up as well – we did not understand the information being given to Putin for him to make his decision. We didn’t have that information. Normally, again, if the decision is around the financial aspect, then most people have similar information – you know, whether an industry should stop investing and reduce supply and allow prices to recover, for example, or returns to recover in an industry after a recession.

But, in this case, we were not using the same information. It is an emotive subject on one half of the decision-making and it is one individual who is making the decision – or at least, from what we understand, it is a very small number of people who are using information they perceive to be one thing. We are using information and making decisions based on a more financial aspect – what the cost of this is – whereas they think the cost is worth the outcome.

JTR: We had Vitaliy Katsenelson on as a guest – you know him quite well, Steve – and he mentioned a mental model he calls ‘Myopic circles’, which is the tendency to surround yourself with people who end up thinking the same way as you or have the same behaviours. Is it possible that, as investors in London or wherever, we were all talking to the same sorts of experts, and there was no-one offering a different view? No-one smashing their fists on the table and saying, no, this is what will happen?

RR: I think, in this situation, we did try and seek out both sides. We have a similar process when we first look at a new company – you want to find out the people who are very positive on it, the people who are negative on it and the rationales behind that and then make a decision, obviously, based on all the other work you do around stocks. It is similar in this case – especially coming back to the fact that we are more financially and numerically oriented yet there are obviously some qualitative aspects to investing as well.

But this was a topic we felt we didn't perhaps know enough about and therefore we needed external expert help. So you seek out the experts who are telling you it is absolutely going to happen and the reasons for that and then there were the people – who tended actually to be based in Russia and commentating on domestic politics – who would give you the rationale for why this absolutely wasn’t going to happen. So there was quite a divide. There were a lot of local political experts who just absolutely ruled it out – pretty much 100% – and then most of the political experts who were sitting in London, actually, and in the US were saying that this is definitely going to happen. That was quite interesting.

JTR: Do you have any views on that, Steve?

SG: I absolutely agree with that. There was plenty of voices – especially military strategists – and Michael Kofman is one name that comes to mind. This is a person who has been continuously following this conflict – you can see it on Twitter – and who has been saying, look, Russia is doing all of these things, which suggests they are going to invade. Yes – but, going back to the point Rollo brought up earlier, there were a number of times before when Russia was doing the same thing and didn’t invade. Plus, from a military perspective, it had to look like this – whether you are invading or not – because otherwise everybody knows this is pointless.

So we did try to get as many opinions as possible – whether we succeeded or not is a different question. But we tried to listen to people both in and outside Russia. We have a lot of relationships all over Eastern Europe in places like Poland and the Baltic countries, where obviously the impact of this conflict and the potential spill-over is significantly higher – in Lithuania, for example. Not to rake over the same point but, universally, most rational actors thought this was not a likely move because it was irrational. It did not make sense.

Acknowledging the ‘irrationality element’

JTR: Which leads me to my next question – whenever we talk about decision-making, there is a tendency to frame the decision-maker as a rational actor. But what if we are dealing with someone who is irrational? Or maybe it is not that that person is irrational – maybe they behave or are looking at the world in a completely different way from how we see or understand the world. Or maybe their timeframes are completely different from ours and that makes their decision look irrational. Maybe, in their own eyes, those sorts of decisions are rational. As investors, then, how can we incorporate that ‘irrationality element’? Or that element of someone just having a view of the world that is very different from ours, which leads them to a conclusions that might be ‘wrong’ in our own eyes?

RR: Yes – it is a tricky one because I suppose, as you have mentioned, what we perceive to be irrational might be another person’s rational outcome. So if you have that view or you get a sense the opposition has a

more irrational view than you – in your perception – then I guess the range of outcomes you can think of will be much wider. And then, of course, the probabilities you have attached to those become much more blurred – or maybe more equal across these wide range of probabilities. Whereas, if there are two people who think in a similar way, then perhaps you can find a stronger consensus on what the outcome may be.

So that is one of the big lessons for me here: that the range of outcomes was much wider and the probabilities attached were clearly incorrect – for me – because, as I mentioned before, my feeling was we were making decisions based on more financial terms and economic costs, but perhaps we should have framed the question slightly differently.

SG: Maybe to add to that, and switch topics a little bit, whenever we are making an investment decision, there is always a person on the other side of the trade – whether you are buying or selling, somebody else is making the opposite decision. So in our investment process, we try to understand what their thinking is – because you shouldn’t assume this person does not know what they are doing. That is especially so when you are dealing with an emerging market as an outsider – I mean, we have been investing in Eastern Europe for a long time but we still do it from an office in New York. We travel quite a bit but we understand we are not insiders.

So, more often than not, the people who are on the other side of the trade from us will know more about the company than we do and will know more about the local peculiarities than we do. So how do we get comfortable with that? The way we got comfortable with it over the years – and we have been reasonably successful at it – is by trying to understand the thinking of the people on the other side of the trade. What is their time horizon? That is a very important question.

And what is their cost of capital? Not to be too technical but, if we are operating with a cost of capital of 5%, 6%, 7%, the people on the other side may be thinking, unless I get my money back within two years, it’s not worth it. Well, I’m happy to get my money back after two years – and I can put myself on the other side of the trade. Oftentimes you can have some kind of short-term situation with a company but you can see it is very likely things will be fine a year or two down the road – so you just have to make sure the company makes it to the other side. So everybody is making a rational decision but they are making it based on their own facts and circumstances. Understanding those facts and circumstances is where you end up being right or wrong.

Balancing the influence of subjective experience

JTR: Two or three years ago, I was listening to a podcast – I think it was Masters in Business – and a well-known emerging markets fund manager said, if you had invested in Russia in the second half of 1998, you would have gone on to compound your money at 18%, in US dollars, for the next 20 years – beating every single market in the world, including the NASDAQ. And I thought, no, that's completely wrong – but, when I came into the office the next day and checked it on Bloomberg, lo and behold, it was true! Russia tends to be seen as a market where there is always a little fear involved – and Rollo, you were an investor there for 10-plus years; Steve, you’ve been around for 17 years investing in that specific market. Now, what happened after 1998 happened again – maybe not to the same magnitude, but those sorts of crises, where the market completely sold off and offered the chance to make some great returns, cropped up two or three times over the last 15 years. And you guys not only survived those crises, you did very well out of them. So when you were assessing the probability of something bad happening a few months back, that is helping to inform your own opinions, because you have seen this happening to a certain extent before. My question is, did those experiences play against you a bit?

RR: Well, yes, there have been many crises associated with investing in Eastern Europe – in fact, it feels like there is one every five minutes! So we feel like we have a lot of experience in big drawdowns in stockmarkets and, over time, you learn to try and time investments to make the best absolute and, hopefully, relative returns – obviously, we are paid on a benchmark-relative basis to manage the fund. So we did gain a lot of experience and we did tend to make our best absolute and relative returns in the immediate aftermath of crises.

That is because you have built up a very good understanding of the value of businesses on a more normalised basis; you have tracked businesses that survived big recessions and economic crises; and you have followed them and bought them on the other side, when they tended to take lots of market share and compound very nicely at very high returns. But, in those events, there is a market-clearing mechanism because they are more financial in nature. People stop investing, companies go bust, markets clear and prices normalise.

The difference here was there is not really a clearing mechanism to a war. I have never had to invest when two countries go to war – and hopefully I will never have to do it again, in my life. But that is one of the major differences here: normally you can make decisions based on numbers – as I say, market clearing – but this was not one of those events.

SG: Just to add a couple of points to that. One is that, in all of the crises – and they have been numerous as far as investing in Russia and Eastern Europe is concerned – one of the questions we always ask is whether or not the operating environment for the companies has changed dramatically as a result of the crisis. It is one thing to have an economic crisis; it is quite another to have what we have now, which is essentially capital controls. That was never the case with Russia before and we did not think we were likely to have capital controls – even in the case of an invasion – just because of how reliant Europe is on Russian energy. I mean, countries in Europe are still trying to figure out whether they will be able to survive without Russian energy but that was one of the things we looked at as far as what was likely to happen and what the operating environment would be going forward.

The second thing – and kind of adding to what Rollo was saying as far as what happens during the crisis – is we do not invest in markets, we invest in companies. And these companies then operate within their market and play the hand they are dealt. And great companies – and we try to find great companies – will use the crisis to become better. They will cut costs, the marketing dollar will go further and they will gain market share as a result – and it is fine if your earnings go down for a little bit because of the demand destruction. But if, on the other side, the growth rate for the country is still there, the market is still there and you have a better player operating in a better environment, then this is absolutely the time to invest – especially if the stock price is cheaper.

And one of the things that has been happening in Russia over the 25 or so years we have been investing there as a firm is the quality of corporates has changed dramatically. In the 1990s, you had companies that were trying to figure out what capitalism was – because they were coming out of 75-plus years of socialism, of communism, where there was no concept of ‘return on invested capital’. How does that work? What do you do with that? You had a plan – you built a plan – but you didn’t care whether you made money.

So you had companies that were emerging from that environment and you had business people who were running the companies and making mistakes and learning. And over time – five years, 10 years – this is cumulative because, when you go from 10 years of experience to 20 years of experience, it is not just 10 more years, it is also double. So especially after 2014 – since when access to capital in Russia has become more difficult as a result of the past conflict in Ukraine – you have had companies that became much better from the point of view of decision-making and capital allocation than they were before.

And they were cheaper too. And they were doing all the right things from the point of view of thinking how to invest capital and treat investors. And in a way, that is what trapped us into that market: we saw the potential risks with investing in Russia – we don’t turn a blind eye to that – but, while you have that on the one hand, on the other, you have companies that are the best in the world within certain industries available to you at single-digit multiples. As a value investor, that is very difficult to ignore.

JTR: Yes, that is something you were both saying in the days and weeks before the invasion – and in the days after the invasion. How sad this was – obviously the human tragedy – but, as investors, Russia had some really good companies and you had been meeting many of them for many years.

RR: Yes – it is one of the very sad side-effects of it all. There is a huge amount of talent in Russia, especially on the technology side. And there are some phenomenal companies there that we were invested in and that could have done some great things – not just within Russia, but on a more global scale as well. And you were just starting to see some of those plans being thought through and fleshed out.

So this is one of the calculations you are making around the cost of all of this for Russia because, you know, talent and people are movable objects. And there was a very strong sense that, if there was to be a war and with the sanctions that would pervade after that, a lot of these people would just leave the country and seek other opportunities around the globe. And that has been the case – many tens of thousands of people have left because they do not see a future in the country. And that will have a huge negative impact on some of these phenomenal companies that we invested in and that were doing some great things.

Judge decisions by process not outcome

JTR: Robert Armstrong, in his Unhedged column in the FT, wrote two pieces on Russia – one before the invasion, one after. Before the invasion, he argued Russian companies were good and trading at very low valuations so it seemed a very good investment opportunity and he assigned a low probability of anything really bad happening – which is pretty much everything we have been discussing today. Then he wrote another piece after the invasion saying he had been proved wrong. But I think he was ‘resulting’ – another Annie Duke idea I would like to bring up in a second – in the sense that, after the fact, he was judging his pre-invasion view based on what actually happened. One line he wrote that particularly caught my eye was the Russian invasion was “a low-probability event” – but just because something is low-probability does not mean it is not going to happen. The chances of a coin landing heads 20 times in a row are very small but they are not zero – and, in fact it is more probable than most people realise – and a similar thing happened in many people’s assessment of the chances of a Russian invasion – the probability was low but it was still not zero. Would you agree with that?

SG: Would I agree the probability was not zero? Yes!

JTR: No! More the fact that just because a probability was low and yet something still happened does not necessarily make the process behind a decision wrong.

SG: I would generally agree with that. One thing we haven’t really discussed yet – and it’s very difficult to take into account – is we are not flipping coins here. Yes, the likelihood of getting 20 heads in a row is what it is but the probabilities here are defined by decision-making – so it is the likelihood of what a particular person decides to do. The invasion was not a random thing that would happen one out of four times or one out of 10 times or whatever – it was just how a particular person decides, based on the facts that they have, and you as an outsider try to get into their head and try to figure out the likelihood of them thinking one way or another.

Yes, there is some element of ‘resulting’ from one point of view – that, now we are looking back, we might say, well, OK, we didn’t take this or that into account. As an example, who was providing the information for President Putin to make the decisions he has made? We don’t know and now, post facto, it seems like something we should have been taking into account. So you just try to improve the process, I think, and hopefully you get to make more decisions.

That is something Buffett was saying about bankruptcy – a string of any numbers multiplied by zero is still zero, right? And, as emerging market investors, part of reason we diversified away from Russia and into other countries within emerging Eastern Europe was to have diversification. In emerging markets, unpredictable things happen so you want to be more diversified – to an extent you feel comfortable with – as that allows you to make more decisions later and learn from the previous ones. Whether that is a case of resulting or not, I think is very difficult to say.

RR: I would completely agree with that – and with exactly how you phrased it on the resulting side. It is the decision of one person or, as I mentioned before, just a small number of people. And I do not feel like I have had an accurate view of what information they used to make their decision. Unfortunately, the probability ended up being 100% –  it happened and it is just one of those things. You have to have a lot of humility in investment at the end of the day. You get a lot of things wrong and this was one that I feel I just significantly underestimated – because the way we perhaps think about the world is different from the leader of a large nation who believes they are under attack. Or, you know, has more emotive feelings for an individual country than, say, a Brit sitting in London making investment decisions. I totally get the concept of resulting but this, I think, is a slightly different situation to try and apply that concept to.

JTR: Maybe this is a good time to actually define what resulting is – or else Emily will have to do so at the start! Simply put, it is the human tendency to judge a decision by its outcome rather than the process used to reach that decision and, as we said, the concept is used in poker – and was certainly popularised, if not created, by Annie Duke. I think there is a lot of resulting when we think about events like what has just happened in Russia – and investing people in general do tend to refer to the idea a lot. As a conclusion to our session, then, I would like to ask, how can we try to avoid resulting? And how can we communicate to our clients and our investors the importance of avoiding resulting?

RR: Going back to the resulting point, I guess we would need to have a lot of experience in investing on a pre-war basis – you know, we would have to have been around in 1939 and understood what was happening in terms of the decisions being made in the build-up to the Second World War; and then we would also have had to have been around in 1914 and so on and so on. So getting the number of data points to make an accurate assessment of whether you are resulting in this case or not is, I think, pretty impossible.

You can replay lots of passes in a football match, say, and build up an idea of the probability-weighted outcomes but, because this is such a rare event, you don’t have sufficient data points to be able to draw firm conclusions on whether you are resulting or not. My personal view is I simply got the probabilities way wrong here because I could not sufficiently get into the mindset of the person making the decision on the other side.

But we make decisions, as I mentioned, where you have tried to apply your probabilistic outcomes to the situation in order to see what the risk-adjusted upside is, or the probability of success of the investment, and we accept it when these are sometimes wrong. You felt like the process was correct, you got the decision wrong – OK, let’s move on. Sometimes the process may not have been as good as it should have been and you learn and recalibrate and then move on to try and make yourself a better investor in the future.

SG: To add to that, there are two parts to a result – there is a process and an outcome and, while the outcome is what it is, you can try to improve your process. So one of the tools we use in that regard is investment journals, where you try to note down the process that went into an investment decision and what you were thinking at the time and then, based on the result, you try to figure out what worked and what did not work. And one of the things you can do with that is see whether there are situations in which you make certain types of decisions that lead to poor outcomes – and then try to avoid those.

Just not with big things like war. Obviously – and thankfully – as Rollo was saying, you do not have a lot of examples where you have to make those types of decisions. But every time you make an investment decision about a company – whether it is in a particular industry; whether it has particular attributes – those things you can control for and you will more likely than not get to make decisions like that again in the future. And so seeing what you thought before – especially if you have done it 10 times and you were right nine times – then great. And if you were right two times out of 10, maybe you should not be making that decision or maybe somebody else should be!

RR: That is also part of the process we have in our emerging markets team, actually. Every six months, we have a sit down – and it is quite cathartic! You know – you go through all the terrible decisions you have made, and tell everybody about them and why you are a bad person and so on! But it is an extremely useful way of learning because it is just an open and honest forum. And you hope that people can take away some of the conclusions from it and, as I say, go on to make better decisions in the future. It is a very useful exercise.

JTR: Rollo, Steve – thank you very much. This was fascinating.

RR: Thank you.

SG: Thank you.


Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team and manage Emerging Market Value. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet, I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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