The wisdom of Wonko the Sane

In ‘So Long, and Thanks for All the Fish’, the fourth instalment of Douglas Adams’ ‘Hitchhikers Guide to the Galaxy’ trilogy (yes, we know), the scientist John Watson prefers to go by his childhood name Wonko the Sane. He explains why to anti-hero Arthur Dent: “I'm a scientist and I know what constitutes proof. But the reason I call myself by my childhood name is to remind myself that a scientist must also be absolutely like a child. If he sees a thing, he must say that he sees it, whether it was what he thought he was going to see or not. See first, think later, then test. But always see first. Otherwise, you will only see what you were expecting. Most scientists forget that.”

There are some obvious analogies with investing, relating to prejudice, anchoring and a host of other behavioural biases. It is all too easy to look at a company, industry or region and allow pre-conceived ideas to influence one’s analysis and decision-making, without giving the facts a chance to speak for themselves. ‘Japanese companies are run for society, not shareholders’ … ‘politicians and regulators will never again allow banks to make excess returns’ … ‘China has become uninvestable’ … ‘traditional automakers and suppliers are all in structural decline’ … ‘oil and gas companies have no future in a green economy’. We regularly come across such sweeping generalisations, often in relation to stocks in our portfolios!

Of course, many generalisations have some basis in fact, and it would be naïve to dismiss them out of hand. Japanese companies generally do abide by a social contract to satisfy many stakeholders, not just shareholders. Banks are unlikely to again earn the returns on equity that they did in the years preceding the Global Financial Crisis. Government and regulatory factors may be more important when investing in Chinese companies than in an equivalent Western company. And so on. But dismissing entire sectors or regions because of what the consensus expects may lead to missing out on attractive investment opportunities, which have been disregarded precisely because most investors are only seeing what they expected to see, rather than what is actually there.

People see what they expect to see even at the most basic level: a company’s share price. If a share price has collapsed it must be a ‘bad’ company; if it has skyrocketed it must be a ‘good’ company, right? Not necessarily, we would argue, and we are not alone here. Legendary investor Seth Klarman nicely expressed it like this: “The latest trade of a security creates a dangerous illusion that its market price approximates its true value.”

In Ninety One’s Value team, we make a conscious effort to adopt the required childlike mindset (you should see our team meetings) and look at investment opportunities with an open mind, even if this can result in some friction with conventional wisdom. Going against the grain can be uncomfortable, but Wonko offers another valuable perspective here: “The other reason I call myself Wonko the Sane is so that people will think I am a fool. That allows me to say what I see when I see it. You can’t possibly be a scientist if you mind people thinking that you’re a fool.” While we are probably less keen to be thought fools, we know what he means. You often need a thick skin to run counter to the herd, entering sectors others are exiting, and generally tolerating a chorus of ‘what are you doing investing in that?’ – at least until a company’s performance improves. Perhaps we will opt for ‘contrarian’ rather than ‘fool’. Either way, when approaching new investment opportunities, we resolve in 2024 to continue to see first and think later.

Past performance does not predict future returns; losses may be made.