Successful investing can sometimes feel like an armed struggle. On the one hand, our rational brains can adeptly assemble slivers of information into a life-like schema of how a company makes money. On the other, powerful emotions turn rational argument to rubble, replaced by raw impulse. In these fleeting moments it’s as if my brain is tied to a lunatic, and that lunatic is me.
Okay, it’s not quite that bad. But it does make the point: inside every successful value investor is a herd-chasing neurotic, itching to break out and make a Kamikaze strike on the nearest portfolio. Even for the most skilled investor, this mental struggle is never fully settled. After prevailing in one battle, along comes another, this time fought on a different landscape.
Beware the appeal of the narrative
Choose facts over the personality of those presenting them
The hard work of value investing is what makes it successful
Only with reflection and modest, incremental behavioural adjustments do we learn to resist our natural impulses, which is why the long battle fought by John Yudkin and Ancel Keys over the causes of obesity is so instructive.
In 1955, US President Dwight Eisenhower had a heart attack. As The Guardian reports, the next day his chief physician, Dr Paul Dudley White, ‘gave a press conference at which he instructed Americans to avoid heart disease: stop smoking and cut down on fat and cholesterol.’
Up until the 1920s, heart disease was rare. By the ’50s it was becoming more common. After Eisenhower’s attack a public campaign commenced, based on the work of Dr Ancel Keys, a nutritionist at the University of Minnesota, who believed saturated fat was the source of the problem.
A brisk walk through a modern supermarket reveals the extent to which Keys’ belief has prevailed; margarine has displaced butter; full cream milk has no cream; fat butchers rave about ‘lean’ meat; and only a few of us have eggs for breakfast now. Low fat has become synonymous with good health.
Not so sweet
As far back as 1957, however, John Yudkin believed that sugar was the problem. A public battle ensued, one settled by the publication of the Seven Countries study in 1970. As Keys had anticipated, it showed a correlation between heart disease and the consumption of saturated fats.
Undeterred, Yudkin went ahead and published his book – Pure, White, and Deadly – in 1972, suggesting that sugar was the culprit. From that point, his career was over. He was uninvited to conferences and refused publication by academic journals. Even his university college turned against him, the man that had established its nutrition department. He died in 1995 a ‘disappointed, largely forgotten man’.
All science is contingent and subject to revision. There’s no certainty that current research will be the final word. But the latest evidence, itself a reflection of Yudkin’s early work, suggests Keys was wrong and Yudkin was right. It is sugar, not fat, that is now the prime enemy of good health.
As a consequence, we’ve lived with four decades of erroneous health policy and far more obesity, heart disease and diabetes than we might otherwise have expected. The story of the battle between these two positions, told in The Guardian’s excellent Long Read section, is loaded with lessons for investors, especially those like me that are carrying a few extra pounds.
If investing were a science, nutrition might be pure maths. Subjects can be studied over decades through controlled trials, yielding reliable data sets and conclusions subject to peer review. Any evidence that subsequently challenges conventional wisdom should shift opinion. That is how science should work.
So, in perhaps the greatest health challenge of our age, how did governments, scientists and the medical profession get it so wrong for so long? And what possible lessons can this have for investors?
The first concerns the pull of a strong narrative. Investors caught up in the resources super-cycle, the Internet boom, ANZ’s now failed Asian expansion – in fact almost every bubble – will have first-hand experience of the seductive nature of a good story.
Keys had little trouble convincing the public and health officials that if you eat too much saturated fat you become fat. A gram of fat contains twice the calories of protein or carbohydrate, so the idea that obesity was a result of consuming more calories than one expends was quickly accepted. The narrative, like an industrialising China delivering constantly higher iron ore prices, was easy to grasp.
The real story is more complex. The move away from saturated fat increased carbohydrate consumption, especially of refined sugar. Supporters of the carbohydrate-insulin hypothesis believe that is the problem, a position well understood by John Yudkin 40 years ago. The research into the relationship between sugar and heart disease was pretty stable. It was the public’s perception of the cause of heart disease that changed.
There is a parallel here with value investing, now widely accepted but (thankfully) infrequently practised. Ian Leslie of The Guardian story puts it like this: ‘We tend to think of heretics as contrarians, individuals with a compulsion to flout conventional wisdom. But sometimes a heretic is simply a mainstream thinker who stays facing the same way while everyone around him turns 180 degrees.’
That’s what value investing often feels like. Periodic bouts of collective delusion may conspire to make investors believe that any aged-care sector stock, for example, will make money. Or that population growth is sufficient to fill the pockets of supermarket investors. Such narratives have an internal but flawed logic. As the crowd turns on a dime we must stand firm, interrogate the facts, and resist the pull of easy narratives.
Over Yudkin’s lifetime the facts as he saw them did not win out. The reason for that offers another lesson: our brains place as much weight on the person making an argument as the argument itself. By all accounts, Yudkin was a taciturn, quiet man happy to let his facts do the talking. His opponent was combative, excoriating Yudkin at every opportunity, and ambitious. Accumulating political power, he won people over with big data and a powerful personality.
Investors that have fallen victim to a charismatic CEO would understand the dangers. Humans are naturally attracted to confident, enthusiastic people. How else to explain why good-looking people earn more than the rest of us? Our brains confuse the careful evaluation of a set of facts with a personal assessment of the person representing them.
This can really get us into trouble. Would Enron have captured the hearts of Wall Street were it not for the charisma and ‘visionary’ status of Jeffery Skilling? Would James Packer have backed One.Tel without Jodee Rich? Charisma and the certainty that often accompanies it has a dark side, muddying our judgments of business leaders, their abilities and arguments. To invest successfully we must not let the personalities behind a business blind us to the realities of the business itself.
Keys’ convincing use of ‘big data’ illuminates another key point about facts and their manipulation. The Seven Countries study into the relationship between saturated fat and heart disease did indeed support a correlation. This was a comprehensive piece of research, running over six years following 12,770 men in Italy, Greece, Yugoslavia, Finland, Netherlands, Japan and the United States. But France and Germany, which consume vast quantities of saturated fat, weren’t included. Why? Keys knew they both had relatively low rates of heart disease. The implication is that he cherry-picked the data.
This would not be unusual. Keys had argued his position strongly, achieving a level of professional power and influence in doing so. To let the data speak its truth would put that at risk. As former NSW Labor premier Jack Lang put it: ‘Always back the horse named self-interest, son. It’ll be the only one trying.’
Again, investors will be familiar with this tendency. One simply cannot trust data, especially from a company or industry body, without first examining the assumptions and methodology behind it. There’s no avoiding this, which is why value investing is such hard work. This is where we get our edge.
As these factors combined, Keys argument took on an irresistible momentum. Once it became accepted wisdom, too many careers and reputations were at stake for contrary positions to take hold. Only with the retirement of this cohort could Yudkin’s position re-assert itself.
Here, thankfully, the analogy breaks down. After 40 years Yudkin has his posthumous vindication. Value investors need not wait that long. Whilst the market does misprice stocks – many mentioned in Brickbats and bouquets parts 1 and 2 are good examples – these are usually corrected, and sometimes quickly. While investors might benefit from having Yudkin’s personal qualities, we do not require his beyond-the-grave like patience. Our moment of vindication comes often more quickly than we expect, delivering financial rewards rather than career death.
Still, the process itself is laden with mind-bombs like the narrative fallacy, the illusion of unbiased data and the conflation of the power of an argument with the personality of the person making it. The story of Keys and Ludkin is a great lesson in avoiding these mental traps.