The mainstream media’s breathless descriptions of the ring Prince Harry presented to Meghan Markle as he went down on one knee to propose are likely to have provoked a variety of reactions.
Here on The Value Perspective, for example, we were instantly reminded of a piece we wrote three years ago on a potential link between the amount a couple spend on their wedding and the duration of their marriage.
Nor, we should very swiftly add, are we being churlish or even unromantic here.
For a good many of the articles written about the latest royal engagement over the last couple of days focused on the ring and highlighted how, rather than being bought, two of the three diamonds in the arrangement – which was designed by the prince himself – came from his mother’s own collection.
Avoid buying large diamonds?
Prevously we have touched on the idea that anyone wanting their marriage to last would do well to avoid buying diamonds or indeed incurring much else in the way of expense.
That, at least, had been the conclusion reached by the US economists Andrew Francis and Hugo Mialon in their paper A Diamond is Forever and Other Fairy Tales.
The study uses data from a survey of more than 3,000 US adults to evaluate the association between wedding spending and marriage duration.
“Controlling for a number of demographic and relationship characteristics,” it notes, “we find evidence marriage duration is inversely associated with spending on the engagement ring and wedding ceremony.”
Francis and Mialon identify a number of interesting trends through the use of a ‘Cox proportional-hazards model’. This is essentially a statistical technique that can be used to indicate the chances of something happening to a particular group of people and, as such, is often used in epidemiology – the study of the patterns, causes and effects of diseases within defined populations.
Big weddings could mean higher chance of divorce
For their part, Francis and Mialon’s predictions relate the chances of getting divorced to how much a couple’s wedding cost.
So, for example, from the sample of women who were surveyed, they conclude the hazard of divorce associated with spending more than $20,000 (currecntly £15,100) on a wedding is 3.5 times higher than the hazard of divorce for a couple spending between $5,000 and $10,000.
Indeed, across the piece, the paper appears to show that the more a couple spends on their big day, the worse their outcome – so why might that be?
You may not be surprised to learn The Value Perspective has a theory on this based around value investing principles.
We will focus on the wedding angle first and then finish with the subject where we feel on surer ground.
Why is this the case?
We would suggest there is at least a possibility that when people spend large amounts on their wedding day, they may be focusing on more than the fundamental point of wanting to spend the rest of their life with their partner.
Be it a great party, a stunning dress, a flock of white doves, saying ‘I do’ on a Caribbean beach or whatever, it may be that people are buying something other than marriage.
Francis and Mialon’s paper, as well as other surveys, did highlight some variables – for example these three factors all increase the chances of staying married:
- Having more guests
- High household income
- Being more educated.
Interestingly, however, in terms of avoiding divorce, it appears that overspending on your wedding effectively undoes all the benefit of being educated to a high level.
If you spent four years at university, the paper says, you are half as likely to get divorced as someone who never went at all – yet you can undo all that and more by spending above $20,000 on your wedding as opposed to less than $5,000.
That is a big impact and, as we have noted before in pieces such as Meeting criteria, we do like impacts that are big rather than merely statistically significant.
Nevertheless, we would never pretend this sort of marriage guidance, as it were, is a strenght of The Value Perspective and, should you still feel compelled to follow the recommendations of Bride magazine that couples spend 12 months planning their wedding and work their way through a checklist of no fewer than 44 tasks, then of course that is what you must do.
What does this have to do with investment?
What does this have to do with investment? Well it comes down to a matter of focus. Our above theory was based on couples who are potentially focusing on the wedding (the means) rather than their marriage (the outcome).
This resonates with some equity funds.
Among the myriad of equity fund options facing the modern investor are the themed portfolios that target businesses with big global brands or that enjoy high returns on invested capital or possess great technologies or operate in particular industries.
In every one of these circumstances, we believe the portfolios and their managers are looking for the wrong thing.
Looking for the wrong thing
Rather than setting out to own shares in good businesses, which is at best a means to an end, they should be looking for the end itself – in other words an outcome. An outcome such as to outperform a benchmark index or to generate a decent return on the capital they themselves have invested.
What these investors are implicitly saying is, if you own a business that has big global brands or whatever, then its shares will do very well – but there is not necessarily a causal relationship between those two statements.
Far more important is to focus on the right outcome: the generation of superior returns.
A century of history suggests identifying undervalued companies is an effective way of doing this (although past performance is not a guide to future results).
Whether you then live happily ever after will continue to be up to you.