What he meant was that just because a story sounds compelling doesn’t mean it makes a good investment – stories are meant to create excitement and draw us in, and a skilfully constructed yarn can distract us from other mundane details that might be more pertinent to an investment case. My erstwhile colleague Matt Allan was always mindful of this when assessing oil and gas minnows, and was particularly wary of what he called ‘stock promoters’ - executives who on more than one occasion had proved adept at convincing investors to plough money into the most speculative ventures. My own lesson in the powerful allure of stock market storytelling came during the dot-com boom – and we all know how many of those investment tales did not have a happy ending.
But it isn’t just highly speculative investment manias that rely on such narratives to convince investors to part with their cash. Companies of all sizes employ armies of spin merchants to put a gloss on their businesses – in fact, it’s suggested that in the US there are now nearly five public relations practitioners working for every one journalist. And where so much spin is employed, one can be forgiven for concluding that somehow the intention is to obscure reality - perhaps that’s why, as Ian Smith points out in his Taking Stock column on page 48, business leaders are trusted by so few to tell the truth.
In most cases, though, I am sure it is not the intention of business to deceive. Sometimes I wonder if those running companies are in fact just as deceived by their own spin, whether it comes to the benefits of large-scale M&A or the wisdom of unfettered organic expansion. The jury is still out as to whether the biggest story of all, the one that led to the credit crunch - the idea that bad mortgages could be packaged up into good debt – was deliberate fraud or innocent hubris on the part of the financial services industry.
It has taken one incredible storyteller, Michael Lewis of Big Short fame, to help us untangle this question, and his body of work serves as a useful reminder that stories can serve a very useful purpose in finance, where complex ideas do need distilling into simplified summaries that can be widely understood. Likewise, the idea of the elevator pitch is a useful tool – only if an investment case can be explained in a minute is it worthy of further investigation. But these stories should only ever be a starting point – they are no substitute for thorough analysis because the devil is often in the detail.
