The following will sound irrelevant to Marty McFly (Back to the Future 1, 2, 3…) and others with his technology, or to those psychics that know what´s in store for us in the future. However for those more like myself, here it goes: to invest one doesn´t need to guess the future, in fact we should avoid anything that even looks like guesswork.
Allow me to elaborate. Any investor faces uncertainty, every day. Markets are uncertain as reality around us is uncertain, and what´s more, people, who are the component units of markets react in unpredictable ways to events. Everything impacts everything else and everything is connected. For example, if there is too much rain in Australia and Indonesia the loading and shipping of coal gets delayed, which in turn causes electricity generation costs to rise globally, then inflation picks up, interest rates are hiked in response, this makes mortgage installments less affordable and then consumers budgets for their holidays suffer… Or perhaps thanks to there being less coal shipped the cost of shipping grain goes down, which reduces food prices and inflation, then interest rates are cut and consumers budgets for their holidays increase… So which is it? And should I buy or sell?
To tell the truth I do not feel capable of guessing too well – I once tried my skill/luck in a football pool on the Spanish League and got…zero! That said I really haven´t come across anyone who could guess a lot better than me, or at least not good enough to invest like that.
Unfortunately in the investment profession, perhaps due to competition, “a game of chicken” often takes place to see who dares to get closer to the edge. Very well educated professionals, used to projecting self confidence at school, at their MBA…and now competing for the next bonus and the next promotion, feel compelled to go beyond and forecast more and better: for example, due to the excessive rains in Australia, the recommendation is buy and the target return is 15% within the next 6 months!
The virtuous circle of hard work at some point turned into the vicious circle of fortune telling. In many ways the toughest words in finance are “I DON´T KNOW”. But the truth is that sometimes, after having tried with all your might, we find ourselves at a dead end and it is crucial to admit it.
This liberating act, of reluctant humility, should help us to stay focused on what truly is our work, the one thing we can control – in my case that is to strive to understand businesses, to value assets and to learn who runs their companies better or worse, what are the key differences, how things evolve, etc. Even more importantly, in this way we get to accept that often the reasonable doubt is too great and hence we should NOT invest.
A recent example for me was the Indian mobile operator RJio, controlled by the wealthiest man in India, Mr. Mukesh Ambani. This company had been created very recently and owned extremely good quality assets ($22bn worth of 4G spectrum and fibre network) and in 2016 it was launching a frontal attack on the market to onboard 100 million subscribers from scratch in 6 months – that is 2.5x the size of Telefónica Spain in just 6 months! The operator was valued at zero within the Reliance Industries conglomerate by the market despite the fact that the launch had a high chance of success – after all, their service was better vs that of the competition and it was given away for free for a few months. However, the key final question which I could not answer was: is RJio going to make huge profits or are they going to make huge losses and burn a ton of cash, depending on the response from competition? Competition among Indian Telcos has been notoriously vicious for many years and it was virtually impossible to tell whether there would be a price war or not. If there was war RJio could bleed off the conglomerate and the valuation could be a large negative. If there was no war it would all have been a brilliant move by RJio. I think the right decision at the time was to say: Actually I do not know, I cannot tell the future, investing is not gambling… Since then Reliance Industries shares are up 40% largely thanks to RJio´s successful launch while the other businesses in the conglomerate helped a bit too. For now RJio telco competitors have opted for consolidation instead of price war.
It is crucial to accept that we will miss out on many investment opportunities, whenever we are not able to fully understand them. But that is ok, investing is also about avoiding “unforced errors”. As of today, reliance is a lot more expensive, and I have to admit, I am still unconvinced that everything will be all right. Therefore, I can only do one thing…keep looking, as there are so many other good opportunities waiting!
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