An investor should be careful not to fall into traps set by ideological myths.
The investment buck always stops with humans and decisions by humans tend to involve the emotions and many of these ideological myths have as their declared purpose the enhancement of some emotionally-charged purpose, or "justice", or "social good", or some other laudable objective. It is, therefore, often very difficult for an investor to analyse certain things objectively and dispassionately.
An investor should always be logical and balance things out and try to work out the probabilities. This is rarely an easy thing to do. Often, logic comes up against the emotions, or the traditional way of doing things, or the ego.
For example, in investment like anything else, admitting that one is wrong is often difficult to do but one must accept one's bad decisions - and the earlier the better - and cut losses, because without admitting one's errors there's no limit to the losses which might be incurred. Perhaps a professional investor's most difficult lesson is to learn to put his or her ego aside.
Ideological myths are effective because they jump on the same psychological bandwagon and are often emotionally highly charged. They usually hide some hidden purpose of their proponents and in most cases this would ultimately involve some sort of transfer of wealth away from the investor and towards either the proponent or his or her pet cause or persons. So the investor must be aware of this.
Many ideologies come to mind and there is an infinity of them. Indeed, they multiply and become many and very quickly, much like humanity, their inventor. It is true that for Aristotle happiness meant the pursuit of intellectual pleasures and ideologies instil their fair share of that, but I am here talking of a more pragmatic sort of contentment, rather than "happiness" (which seems to imply some sort of short-lived euphoria), that of the investor ably caring and enhancing his or her wealth. Again, I am not going to be too concerned about defining "ideology" : take it as meaning any set of ideas or strategies for a better life, or what have you.
Ideological myths are a minefield and are often hard to spot. There are the usual ones, what comes first to mind when one hears the word, such as "free market", "democracy", "socialism", "globalisation", etc. Then there are more difficult ones, such as "fiscal morality", the "Swedish model of the high tax state", the now popular "flat rate tax", "tax harmonisation", "zero tax regimes", etc. Then there are innocent-sounding but hugely complex ones, like "privatisation", "the independence of such-and-such institution from government", "terrorism", "national security", "environmental protection", "conglomerate", "brand building", etc.
Let me take an example, from finance, both because this is a financial column and to illustrate how fashion grabs even supposedly hard-nosed investors and business people. Ideology is the inspiration of various so-called "business strategies" and these are, of course, usually put forth by business professors or investment banks rather than by bearded radicals hiding in jungles. Many money-spinning strategies are put together by investment banks whose practical orientation usually takes them quite far away from the usual philosophical pastures of ideology, as commonly understood. There are also all sorts of investment fads.
When I started my studies in finance, for example, the accepted wisdom was that big companies should turn themselves into conglomerates. A conglomerate is built via the acquisition of all sorts of disparate businesses, all lumped together into one huge group with the stated purpose of diversifying business, evening out cash flow and thus reducing risk. That was the theory.
Shareholders (i.e. investors) indirectly paid huge fees in order for mergers and acquisitions to take place, in the hope of increasing shareholder value. What happened was that these monsters became terribly difficult to manage and although financial control sometimes works miracles it cannot be made to show a good return on capital if the conglomerate had paid far over the odds for the acquired company. Back then, and to a certain extent today too, if a company got labelled in the media as a potential bid target, its value shot up and, sooner rather than later, one of the big conglomerates went for it, and paid too much, to "steal it away" from another conglomerate.
The increased shareholder value did not always materialise, and very rarely to the extent expected, and, in reaction, the solution to all this was a new ideology: "sticking to the knitting". If knitting is what you know, stick to it, and don't go building nuclear plants. The most famous book in this line was Peters and Waterman's In Search of Excellence - a great book to read, even if now rather dated and overtaken by events. It advocated specialisation, focus, commitment to the business and the brand.
All of a sudden, divestitures were all the rage. Conglomerates were being broken down, assets and companies were being sold. But who is to buy all these business which are unrelated to "our business", as the new focus, knitting or whatever, came to be known?
One fascinating thing about business and the market is how ideas take hold and how solutions are found incrementally, piece by piece and little by little. So, at one point, conglomerates realised that if a company is marked for divestiture it can be sold to those persons whose business is the company's business and who else are these persons but the management of the company themselves? So, companies were sold by conglomerates to the management of these subsidiary companies. These managements got the wherewithal by borrowing against the companies they were buying, special management buyout funds which raised part of their funds from the now cash-rich conglomerates, and special deals with some of the conglomerates. And so the move towards decentralisation took off, reversing the previous conglomerisation, and more fees were paid in search of shareholder value.
Today companies are again starting to acquire others at quite a pace but usually acquisitions are in the same line of business, or related businesses, in order to try to be a market leader, and a "significant" one, in a particular sector.
This has to some extent led to brand management problems. Many brands are built up over a great many years at great cost in order to serve as magnets for customers. They are subsequently bought by a dominant firm in that industry for a huge price, only to be killed off. True, competition is reduced, and some of the old business of the terminated brand may be captured by the buying firm, but often the sum total of the custom lost because of the termination is higher than the gains.
In the face of such an ideological rush, in the garb of the most recent growth strategy, most shareholders can either hold on to the shares and implicitly accept the strategy, or else sell the shares. Information would be available though not always to the level of detail required. Importantly, the shareholder would have to disentangle the hard facts and the business proposition from the ideological context in which the proposed transaction is put.
Holding the shares, and going along with the actions proposed by management, is by no means always the wrong thing to do. Often, management has superior information, or there may be fine considerations which ought not be made public, in the interests of the company itself. Acting in fashion does not always mean acting poorly. This consideration makes such assessments even more difficult to do.
In any organisation, big or small, much depends on management. Good management is one that delivers the appropriate shareholder value over the years. A good manager has inbuilt within him or her the desire, the drive and the ability to do good to the organisation. For an investor to make money, the investor should have good management running a good business. If either of these is bad, if you see bad management or a bad business: run. You would know a good management by its fruits. While observing or waiting for the fruits, it pays to have a sense of healthy scepticism, healthy in the sense of remaining generally optimistic.
pvazzopardi@usa.net
Mr Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. Mr Azzopardi or related parties, including the company, and their clients, have an interest in securities mentioned. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such. The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.