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Our most profitable investment ever was probably the combined result of a lot of luck, some skill and plenty of hard work.
We indeed did an extensive fundamental dive, developed a compelling roadmap that drove our fundamental expectations, and we had a reasonable gauge on the behavioral mistakes that were preventing Mr. Market from seeing what we saw.
But to be clear, to the extent that our gains were driven somewhat by skill and hard work, we did not have an informational “edge”.
Our edge, I think, is that we knew which public information to ignore, and which to spend all our time analyzing. We also had had a good sense that Mr. Market wasn’t focused on the same information, or — if he was — he wasn’t drawing the same conclusions. That was our differentiation. Ultimately, that is what drove our excess returns.
So, over the five years that we owned this stock, guess how many times we met with the CEO?
Sure, we also met with the CFO a few times, and had a dozen or so calls with investor relations (if that), but we got everything we needed from the CEO in those three visits. Moreover, we didn’t learn anything that the market hadn’t heard already, or didn’t know — we just simply observed what information was being presented to the consensus investor. It was our job to then decide which of that information mattered, and which didn’t.
Visiting the CEO every quarter over these five years wasn’t going to make a difference. If anything, it might have even made us less objective about the information we gathered. It may have even given us a false sense of confidence, as hearing the same thing over again might have led to us overweighting possible outcomes simply because we’d heard the same information multiple times from the same source.
This can be particularly true in cases where the CEO is overly optimistic about the prospects of his company. While this wasn’t the case here, we’ve seen this sort of enthusiasm countless times (and been burned by it as well).
Yet the number of company meetings a fund manager or analyst does is often wheeled out to potential fund investors as an indicator of hard work, or access, or effort.
In our case, the successful investment is a global business listed in Europe. I won’t say more than that. But the principle absolutely applies to U.S. companies as well. As a student of behavioral finance and a disciple of Richard Thaler, I believe the key to generating market-beating returns is mitigating our personal biases when making investment decisions. Others in the market, and perhaps the market in aggregate, may not be as objective. When they aren’t, we have that mismatch needed to succeed.
Successful stock-picking isn’t merely about being contrarian, per se; it is about understanding why we are. Whoever is the most objective can see that, and wins.
As a young analyst at a large mutual fund company, I remember some of the marketing pitches we would make. We did a lot of company meetings. At the time, we probably did more than anyone else in the world. I’m not even kidding. And we thereafter — in our meetings with consultants and investors — always highlighted the “number of company visits” as if they were some proxy for excess returns.
Guess what? They weren’t.
Sure, it sounds great in marketing meetings to say “we’ve visited with management a dozen times in the past two years and done three site visits” but that doesn’t mean anything about stock-picking. It doesn’t mean anything about excess returns. But it might say something about bias.
So if someone says they’ve visited management for the sixth time this year, maybe just ask them “why?”
Drew Dickson is the Chief Investment Officer at Albert Bridge Capital, a London-based manager of concentrated equity portfolios for institutional investors. Follow him on Twitter @albertbridgecap. A version of this article was first published on the company’s website — “Are company visits good or bad”