Tips from an astronaut on value investing
Finding a connection between space exploration and value investing is, it turns out, less of a giant leap than one small step for The Value Perspective
Space exploration and value investing rarely, if ever, find themselves mentioned in the same breath.
That said, a passage from Colonel Chris Hadfield’s 2015 book An Astronaut’s Guide to Life on Earth, which we have just finished, showed us connecting the two is not so much a giant leap as – that’s right – one small step for The Value Perspective.
The main thrust of the book is that learning to think like an astronaut can help all of us thrive back down here on earth but the section that really caught our eye focused on attitude to risk.
In it, Hadfield notes how astronauts can be stereotyped as daredevils, thrill-seekers and risk-takers but goes on to argue the reality is completely different.
Astronauts aren't thrill seekers
“Strapping yourself on top of what is essentially a large bomb is plenty risky – there is no need to up the ante,” he reasons. “I’ve never been interested in the just-for-the-hell-of-it rush of, say, bungee-jumping. If you’re an adrenaline junkie, I understand why you’d find that exciting. But I’m not and I don’t. To me, the only good reason to take a risk is that there’s a decent possibility of a reward that outweighs the hazard.”
That last line, of course, could come straight from The Value Perspective – indeed, as pieces such as Investment edges illustrate, such thinking is an integral part of our investment process.
Furthermore, value investors often suffer from a similar misperception as astronauts – that because we invest in what the wider market views as ‘beaten-up’ businesses, we are risk-takers.
Like Hadfield, we would argue the misperceptions about our respective lines of work stem from how people think about risk.
As he writes: “It’s almost comical that astronauts are stereotyped as daredevils and cowboys. As a rule, we are highly methodical and detail-oriented. Our passion isn’t for thrills but for the grindstone and pressing our noses to it.
“We have to: we’re responsible for equipment that has cost taxpayers millions of dollars, and the best insurance we have on our lives is our own dedication to training. Studying, simulating, practising until responses become automatic – astronauts don’t do this only to fulfil Nasa’s requirements. Training is something we do to reduce the odds that we’ll die.”
Value investors take calculated risks
Thankfully, of course, investment is not a life-or-death issue but, as professional investors, you can certainly be responsible for millions – or billions – of people’s money and we are also big fans of tipping the odds in our favour.
As such, we too are hugely dedicated to a process we believe will repay our investors’ faith in us – and it is a process that is not nearly as risky as many might think.
It does admittedly take mental fortitude to go against the crowd but, rather than being risk-takers, most adherents to a value strategy would more likely describe themselves as significantly more risk-averse than the average investor.
While any individual stock in a value portfolio might appear risky in isolation, history suggests buying the cheapest parts of the market on sensible valuations is actually much less risky.
In contrast, the biggest risk in investing is overpaying for assets.
As the father of value investing Benjamin Graham argued, the price paid for any investment should allow for a range of unexpected adverse outcomes – in other words, since many things can go wrong at once, it is prudent to be cautious.
This is known as the ‘margin of safety’ – a principle of which, we would imagine, Hadfield and his peers would approve.
Certainly, rather than aspiring to the kind of investment ‘bungee-jumping’ with which some of our competitors are apparently comfortable, we find ourselves more drawn to the process-driven, risk aversion of astronauts.
As Hadfield concludes his section on risk: “Preparation is not only about managing external risks, but about limiting the likelihood that you’ll unwittingly add to them.”
The Value Perspective team
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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