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OPINION

Rights and wrongs

Rights and wrongs
March 28, 2019
Rights and wrongs

Our cover feature this week highlights how it is possible to be more right than wrong when assessing companies, and in particular how we can avoid those situations where things go very, very wrong – à la Carillion. As Algy Hall writes, the clues are often there for all to see in publicly available accounts, even if some less-scrupulous management teams will often do their very best to tuck the bad bits away where they hope no one is looking. Even the most honest executives can’t predict the future – and, in a world of spin, tend to present their prospects as positively as possible. For investors, getting to the truth – if, indeed, there is such a thing – is very hard. 

If an investment has gone our way – and, essentially, we are directionally right – there are other traps to avoid. We may be successful for the wrong reasons, and learn lessons that serve us very badly in future when luck isn’t on our side – so-called outcome bias. Similarly we may overly focus on our successes and ignore our failures, from which the lessons may in fact be more valuable – a bias known as survivorship. Or we may hang on to a share that has surpassed any sensible basis of valuation – falling into a trap called the endowment effect, that is overvaluing something simply because we own it. 

Even if we feel we have hit upon a truth that everyone else is missing, making that work for us as contrarian investors can be harder still – as some responses to our recent feature on short-selling argued, betting against companies is both hard to do and, in some people’s minds, immoral (I agree, incidentally, with the former but not the latter, especially having watched the excellent Netflix documentary, The China Hustle). As Keynes is said to have put it, if you believe the market is wrong and want to make that bet, it “can remain irrational longer than you can remain solvent”.

On that basis, I am very glad I have not followed my instinct when it came to Ocado (OCDO), a company that I have been very sceptical of in its decade on the market. In the early days that looked well-founded, but right now it looks as though I could not have been more wrong. M&S (MKS) has seen huge value in its grocery business, and Ocado has signed a raft of technology deals with retailers around the world, deals that have lifted Ocado’s share price to an all-time high. I suspect there are many lessons to be learned in this case study, but I’ll stick with one for now: that staying wedded to a view as circumstances change (anchoring) can prove very expensive indeed.