For some, this point undermines their belief that there is such a thing as nice, neat investment analysis where all is known, all is assessable and all is quantifiable, leading to clear-cut investment decisions where doubt is banished and only clarity remains. Sorry, that only exists in hindsight. In the real world – where truth, belief and knowledge are continually confused – there are three categories of knowledge: that which is known, that which can be known and that which is unknowable.
We could forget about the third category since it is beyond perception. Yet that which is unknowable has an annoying habit of turning up unannounced, making itself known and playing hell with our investment plans. From its dark reservoir, things emerge that take shape and become known. In their most dramatic form, they are the likes of the Model T Ford, the IBM 5150 PC, the Apple iPhone – the technological applications that make whole categories of products redundant, trashing the companies that make them. In their place they usher in new products and new companies to invest in.
Of those other two categories – what’s known and what can be known – the first isn’t in doubt. It comprises the facts staring at us – the current year’s revenue growth, the release date of that vital new product, the expiry date for the patent on the blockbuster drug. The only question is what to do with these bits of information. Which are important and what weight do we give them? Which can we ignore?
Then another concern emerges – the known facts overlap with ones that could be known. Okay, we don’t know them, but someone does; there is a whole set of facts out there – even if some are kept under lock and key – that could decisively swing our investment decision. Some we can know if we are sufficiently smart or diligent, well connected or downright lucky (not that we can expect good luck systematically). Yet even then we run into another epistemological problem – we may already have vital bits of information, we just don’t know it. After all, by definition we will be dealing with information that isn’t widely known and, if so, its significance may not be well understood.
And even if we accrue facts, knowledge and understanding by the barrow-load then we may run into still another snag – overconfidence. The more pieces of information someone has to make a judgement, the greater their confidence. That especially applies to experts, yet – here’s the rub – the greater the confidence, the worse the assessment.
Maybe it’s because I know all this that I’m acutely aware of the limitations of my own investment assessments, even if acknowledging that isn’t great salesmanship (though, I’d suggest, that’s a plus). I also dwell on it when an investment goes awry. That prompts me to ask: what should I have known that I didn’t know? Am I dim, or was I just lazy?
This is happening to the income portfolio’s investment in satellite communications provider Inmarsat (ISAT) whose share price, at 594p, has dropped 19 per cent since I bought the stock in August. That makes for a 48 per cent decline from the all-time high the stock hit just 22 months ago.
Granted, Inmarsat hardly looked like a glamour stock when I bought the shares. Its growth has been pedestrian for five years and much depends on the roll-out of its Global Xpress satellite-based high-speed broadband, especially to airlines. Progress was slower than hoped in 2016 as airlines dilly-dallied over contracts and chief executive Rupert Pearce acknowledges that his company is “in an intense market-capture period of potentially short duration”. But, so far, Inmarsat seems to be on the pace. From having 950 aircraft signed up early in 2017 via deals with Lufthansa and British Airways in particular, it now has more than 1,300 after completing an agreement with AirAsia in September. Management still expects revenues from Global Xpress, which were $80m in 2016, to hit $500m by the end of 2020. It also thinks Inmarsat remains on course to meet the City’s profit forecasts for 2017 and 2018.
Meanwhile, nothing interesting is happening on the share register and – so far as my data base tells me – there is no significant short selling. Yet clearly some investors are taking a really bearish view. What do they know – or think they know – that I don’t?
More to the point, what should we do in situations like this? Go back to the basics. Keep asking, what am I missing? Churn the valuation numbers again – is there still a margin of safety between price and value? If so, have the confidence that, in the long run, mean regression will work to your advantage.
That’s what I’m about to do with Inmarsat. But I’m also off on four weeks study leave, during which time I’ll be picking up new tricks on using data. Hopefully revitalised, this column will return on 8 December.
