Value insights: ‘Brilliant leader’ stories can lead investors down the garden path

In Fyodor Dostoevsky’s nineteenth-century classic, Crime and Punishment, the troubled central character, Raskolnikov, fills hundreds of the novel’s pages with his dilemmas, riddles and conundrums, covering life, justice, family, society and humanity itself. In one debate, involving his friend Razumihin and his enemy Porfiry Petrovich, Raskolnikov puts forward his notion that there are two types of men. His hypothesis has some notable parallels to corporate governance and investing opportunities, two centuries later.

Raskolnikov advances the theory that “men are in general divided by a law of nature into two categories, inferior (ordinary), that is, so to say, material that serves only to reproduce its kind, and men who have the gift or the talent to utter a new word”. He suggests further that “the first category … live under control and love to be controlled …. [and] is always the man of the present, the second the man of the future. The first preserve the world and people it, the second move the world and lead it to its goal”. At this point, we must apologise on behalf of the author as men are the only cohort included in Raskolnikov’s (and implicitly Dostoevsky’s) thought experiments, but clearly the conclusions drawn aren’t gender specific.

Reasonable so far, perhaps. But how might the population be split between the ordinary and the extraordinary? Raskolnikov suggests that “people with new ideas, people with the faintest capacity for saying something new, are extremely few in number, extraordinarily so in fact”; whereas “the vast mass of mankind is mere material, and only exists in order by some great effort … to bring into the world at last perhaps one man out of a thousand with a spark of independence”.

And for those of us hoping for a little more than a ‘spark of independence’, Raskolnikov continues, “one in ten thousand perhaps … is born with some independence, and with still greater independence one in a hundred thousand. The man of genius is one of millions, and the great geniuses, the crown of humanity, appear on earth perhaps one in many thousand millions”.

These assertions are clearly controversial, and while we wouldn’t read too much into the claimed proportions of great vs. ordinary, there probably is something to the suggestion that true geniuses, leaders or (in tech parlance) ‘visionaries’ are hard to come by, and very likely in lower proportion than the average market participant appreciates. This is very relevant to investors in ‘management stories’, where (so the sales pitch goes) a true visionary (or collection of visionaries) is able to generate superior returns from even mediocre industries, via their innovation, leadership, focus, foresight or capital allocation.

While some of these management stories do indeed play out according to plan (or better), time and time again we have come across situations where what is attributed to management skill or judgement is more likely some combination of good fortune, savvy self-promotion, excessive use of leverage, or some other tailwind that is unlikely to repeat on the same scale in the future. We are not alone in highlighting the rarity of exceptional leaders. As Jennifer Clark observes in Mondo Agnelli, a history of the Fiat automobile dynasty, “most groups have a potential for greatness that never quite takes off. But every so often, the right person comes along who can put together a handful of superb people, set an impossible goal, engage them in a holy war, and let them rip”.

On the rare occasions where we come across a truly exceptional leader or management team, we are more than happy to incorporate this positive trait into our investment thesis, but we must still remember that it is ultimately the characteristics of the business or industry that prevail in the long run. As Warren Buffett opined, “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”. We won’t be paying up for the crown of humanity anytime soon.