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Investing in a post-truth world

30 November 2016

Russell Harrop, Head of International Equities

2016 has been a ‘marmite’ kind of year - whether you regard it as an annus mirabilis or annus horribilis likely depends on who or what you voted for or where you live. Maybe we are at a historic turning point for the UK and the US, or perhaps history will look back on the year as little more than a change of tack. There is, however, a real danger that what was supposed to be the age of democratisation of information driven by the internet is actually turning out to be the age of mis or even dis-information.

It isn’t hyperbole to say that Mark Zuckerberg of Facebook has more power to influence than Citizen Kane could ever have imagined, as its algorithms (surely in the running for the word of the year as won by ‘post-truth’) beautifully, subconsciously and subliminally confirm our own biases.

Regulation has kept the animal spirits of the market in check much of the time, but though we are fundamental investors, your assets can, and do, get whipsawed by rumours and counter rumours. Whilst in the short term this can be frustrating, (even if false rumours result in prices going up, the balloon’s popping is usually unpleasant) in the long-term we have one huge plus point even in a post-truth world: Published financial accounts.

Whilst companies can, have been and will continue to be, ‘creative’ in their accounting, this is very hard to sustain for long periods of time without plenty of red flags waving ‘look at me, look at me!’ We spend an awful lot of time with our noses buried in profit and loss accounts, balance sheets and cashflow statements in an attempt to find out what’s really going on.

Company managements may not be post-truth, but they are almost always economical with it as they look through their rose-tinted spectacles at a glass perpetually half full. It is true that past performance is no guarantee of future performance, but looking under company bonnets to find out how and where they’ve made money and what management have done when times have been hard gives us great insight into what might happen in the future. Understanding how the costs of a business change when times are good too, lets us know how profligate management are with ‘your’ money. Analysing a decade or more of company accounts is invaluable in this, yet really does appear to depart from the norm in a world chocked-full of quarterly earnings. Analysts hang on managements’ every word during results conference calls for any hint of ‘change in sentiment’ and despair over companies ‘missing’ earnings forecasts by just a couple of percent.

Such short-termism provides plenty of opportunities for long term investors to look through this to see if the hard numbers agree or disagree. My Dad once said, “why so much speculation, when nobody knows. Why not just wait for things to happen?” We’re doing our best to make sure that analysis, thoughtfulness and understanding mean we can keep speculation to a minimum and the performance of clients’ portfolios closely reflects stocks’ operating business compounding away over time.