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29 July 2015
If you’re new to the CSS Investments blog, please make sure you read our introduction post here to find out how this blog will help you become a better informed investor or trader.
This is only my second post following the launch of this blog, and one I hadn’t actually planned on writing.
Others in the company have been contributing so much that I’ve been more busy editing than writing (Plus my Honeymoon recently took me away for a few weeks).
The picture is a little clue on what I was lucky enough to get up to. Just please excuse the gormless expression, I was only a few feet away from a fully grown, wild gorilla!
There was an interesting question in the comments of our ‘Broker Recommendations Explained’ post from one of our community members, Andrew, where he asked:
“What is the worst broker recommendation you have ever seen?”
It seems such a simple question doesn’t it? Surely I could just name a company that was recommended in the past, only to see it make a massive dive in price?
That would surely be the ‘worst’ recommendation, wouldn’t it?
But as I started composing my answer, it became more difficult to do so. It became clear there are far more factors at work in any recommendation that are either unknown or unseen.
I came to the conclusion that I don’t think it’s possible to single out a ‘worst’ recommendation.
It’s not a politician’s answer I promise!
Let me try to explain my reasons, throwing in a ‘disclaimer’ that I’m not a financial expert. In fact, I’m a relative layman who is lucky enough to be surrounded by experts at CSS Investments.
So this is from a personal perspective that is likely a little more ‘basic’ than you may be expecting, but I hope doesn’t diminish the importance of the message.
It is also not strictly only about ‘broker recommendations’ that we reference in The Morning Call, as I wanted to open this up to consider recommendations in general, whether they come from analysts, media or someone you know.
And perhaps this alternative view may spark some further thoughts or debate!
Basically, I think the answer to the question depends on your definition of ‘worst’.
Go back in time far enough and you will find that every broker, finance professional or investor has made a call or recommendation only to see that company’s value fall shortly afterwards.
I’m pretty sure no one has a Delorean; at least not one with a working Flux Capacitor anyway!
But if the judgement of ‘worst’ is based on whether or not the recommendation was profitable or not, I’d suggest it’s the wrong criteria on which to be judged.
The outcome masks too many variables that led to the recommendation.
I guess that if you look back through history, you’ll find recommendations to buy White Star Lines before the Titanic sank. Or more recently Enron or Lehman Brothers before they collapsed.
On first glance, since we now know what happened, these could look like some of the ‘worst’ recommendations ever.
However, if you consider the environment at the time when these recommendations would have been made, see the fundamentals were sound (I have no idea if they were, by the way, just using these as an illustration), just because of the outcome, were these really the worst ever? Or were they victims of unforeseen ‘Black Swan’ events?
By the way, I’m not hoping to open up the debate as to whether they really were unforeseen or not! For another day perhaps…
My way of considering whether there is ever a ‘worst’ recommendation is similar to how I would think about a recommendation from a friend.
Say I’ve asked for a suggestion on a good restaurant to take my wife for her birthday as a surprise. Obviously the consequences are totally different, and I’m using a very basic analogy, but bear with me.
My friend tells me about a restaurant he loves. I’m busy, so I take him on his word without looking into it at all and book a table.
Can I be upset if I turn up with my wife, sit at the table and get a shock when we look at the menu and realise it’s a steak restaurant, and my wife is vegetarian?
My friend gave an honest recommendation based on best information available. I’d not told him my wife was vegetarian, and everything else about the restaurant was fantastic.
He loves the place. Has been many times, knows the manager well, always gets great service and the food is fantastic, at a fair price. He recommended it on the information available to him at the time.
But the fundamental reason why it was a flawed recommendation was hidden from him. That was not his fault.
In this case it was actually my fault for not doing my own research on the restaurant. I did not spend any time checking out the place before I booked, I was busy so trusted that my friend was making the recommendation from a place of authenticity. Which is exactly what he did.
Now I’m faced with a rather irritated wife as it’s quite clear I’ve not put any effort or thought into planning her birthday meal. I’ve got a few days, weeks (or to death do us part perhaps…!) of being reminded about my thoughtlessness and lack of effort.
Perhaps that is a similar situation to something a number of readers can relate to…
This consequence is similar to buying on a recommendation, which loses a chunk of your money. It doesn’t feel good. You know it’s going to take a while to get your portfolio back on track. It nags at you. I hope my wife doesn’t read this…
Sorry, I am quite well known for going off on tangents!
But as I haven’t been around the markets as long as many in this community, I find making every day comparisons help me to understand them. I hope it translates to you if you’re in the same boat.
So let’s get back on topic. I’d suggest this analogy is a little like any recommendation given on a company before a crash.
No one knew the Titanic would sink, or that Enron were hiding hundreds of millions of off book liabilities. They were given on sound analysis of the best available information at the time. Ultimately, you don’t know what you don’t know.
Of course there are other circumstances that will affect the recommendation. People miss things. They don’t connect all the dots.
The problem is that it’s easy to be a judge in hindsight.
Where were today’s critics before the event? Were they pulling money out? Were they advising others to do so? Or implementing a strategy that would either protect themselves, or profit from the reverse?
Plenty of commentators talk about how they saw the Lehman and subsequent financial crisis coming a mile off.
But very few of these ACTUALLY ACTED on it BEFORE it happened. Unfortunately we now hear from these same people saying how ‘obvious’ it was, but did nothing.
No one likes hearing ‘I told you so’ from anyone, especially if all they did is talk and not act. Smugness is an ugly character trait and doesn’t win you many friends, yet the media seems to revel in it!
It’s easy to dissect something after it’s happened. You have the luxury of time, a clarity of distance and a detachment from the psychological and emotional biases that were present at the time.
Consider the decision of Ronald Wayne to sell his 10% share in Apple back in 1976 for $800.
Today that would be worth billions of dollars. It’s easy to think, now we know how Apple became the most profitable company in history, that this appears a ‘crazy’ decision.
But at the time there was no way to know how big Apple would become. In his own words he made the “best decision with the information available to me at the time”. https://en.wikipedia.org/wiki/Ronald_Wayne
If someone had ‘recommended’ that he sold his stake, and he only did so off the back of this advice, perhaps this would look like the worst recommendation in history!
I’ve gone on the assumption that the question about ‘worst’ recommendation was a reference to one made and then a dramatic fall in price.
There are of course others that have been made, and while no crash happened, they were done on the back of poor analysis and research or a flawed strategy.
It is these that I would call the worst.
Before the tightening of regulations I believe that this was more possible than today. My own experience of working with a compliance department for the first time is that everything that we publish as a business is thoroughly scrutinised for its thoroughness of research and accuracy, and is based on best, currently available information.
So perhaps this scenario is less likely to happen today, though it does help to illustrate my thoughts.
I’m not an investor (though once a few large life changing purchases are out the way I fully intend to be!). If I was and I bought a company on a recommendation that turned sour as a result of an event, where the full picture was only available after the fact, and I could see that it was based on solid fundamentals and research; I hope I’d be big enough to accept that it was just part of being in the markets. Even if it hurts!
But if a recommendation is made in order to keep to a quota of producing them, or only to promote a company’s name or brand, then I’d argue it’s not possible to do so with full confidence that they are always well considered.
Market conditions might not suit a daily recommendation, so these advisors or commentators will look for something rather than let the best opportunities reveal themselves. I see this as trying to force your will on something that can’t be controlled. It’s a self-serving interest, rather than value creation for investors out there who need the help to cut out the noise.
Conversely, the same is also true if you flip this scenario around.
What would you think about a recommendation that made double digit gains over the next week?
Pretty good, right?
Would you carry on looking at this source for more ideas?
Would you be more inclined to buy what is recommended?
If you answered yes to any of this, there’s nothing wrong with that. But as in our above restaurant analogy, I didn’t give you the full picture.
You didn’t know that this recommendation was made on the back of a rushed job to ‘get something out’. It wasn’t given much real consideration or research.
“But it went up in double digits” I hear you say?
Yes it did. But it was nothing more than a punt that got lucky. I’m not sure where it came from, but I love the saying – “Even a broken clock is right twice a day”.
The real problem comes when this ‘great’ recommendation is remembered by investors, and the source is followed. Maybe they get another couple right and make more gains.
But over the long term the lack of process and quality analysis reveals itself in the form of horrific performance that, if followed, would lose a large chunk of any portfolio.
I honestly didn’t think when I saw the question from Andrew that this would end up as such a detailed response.
I’m not suggesting I’m right. Perhaps I’ve even got it all wrong, and I should leave it to the experts to respond?!
Perhaps it is possible to single out a ‘worst’ recommendation based on the performance of the company in question?
Though I do think, like most things in life, it’s rarely black or white.
This is why I’m becoming fascinated by the markets, but increasingly more from a human psychology view than purely the mechanics of them.
There will always be information hidden from us. Good professionals, in any industry, make recommendations or give advice based on a combination of knowledge, skill and experience. But there isn’t a human being on the planet that has travelled forward in time, so therefore no one that can give a recommendation or advice with total 100% certainty of the outcome.
However, if that knowledge, skill and experience is used properly to make a recommendation in a way that is focused on how to add value to someone else, that is in the receivers best interests, then that is the best I could personally ask for.
I believe the worst recommendation I could receive from anyone, no matter what the topic, is one made with self-interest. This could also refer one that is ill considered or made without the ‘expert’ putting in everything they’re capable of. I’d view that as unforgivable.
It’s a poor way to operate over the long term, as it hurts those who look up to them and erodes any trust they may have built up. It’s the abuse of the position given to them, the power it bestows them, and an avocation of responsibility.
Ultimately, every outcome is unknown. We only know what is here right now. Use it as best you can, but don’t get caught up lamenting a situation where you lost something. Equally don’t get caught up in too much excitement at the potential gain in a situation.
Both will cloud your judgement.
Whatever your opinion on what I’ve written, I am very grateful to Andrew for the question.
Its help me to explore an area I’d never have thought about, scratch a little ‘philosophy itch’ I didn’t realise I had, and one which goes beyond just the markets.
I would like to think that if you’re still here reading this then you’re also interested in the wider view, so thank you for staying with me during my ramble!
However, if there is a preference to keep things more market focused, please, let me know what you would like to see covered in the comments below, or email me at firstname.lastname@example.org.
Right, best go and book that restaurant. Any recommendations?!
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