RACHEL RICKARD STRAUS: The road less traveled can be a good investment

My partner James and I were driving along a winding country road in north Norfolk one summer a few years ago. The sun was shining and I was anxious to get to our destination so I could jump into the sea.

I was furious when we arrived at a junction and a huge farm vehicle laden with hay pulled up in front of us, forcing us to slow to a crawl. The next junction was 20 miles away, overtaking was too dangerous and we grumpily resigned ourselves to having to stay at the back until then, frustrated and overheated.

But after a few minutes the vehicle suddenly turned off into a field, leaving the road clear in front of me. I can’t tell you how surprised (and relieved) I was. I had so quickly imagined myself driving 20 miles behind the damn thing that I hadn’t considered an alternative.

This memory comes up again and again when I talk to fund managers about investing and the outlook for their sectors.

It’s a trap that investors all too easily fall into: we have such a fixed image of what the future will look like that we become blind to the alternatives.

Sometimes we are overwhelmed by changes that seem to come out of nowhere: the global pandemic that shuts down entire industries, the war in Ukraine that drives up energy costs.

But we can also be surprised by changes that are – in retrospect – as obvious as the fact that a farm vehicle can veer off the road and into a field. For example, the fact that pent-up demand after Covid and billions of pounds of government stimulus would push up inflation.

Even the most celebrated fund managers can be surprisingly shortsighted.

Baillie Gifford European Growth Trust had almost doubled its investors’ money in just two years to July 2021. But its winning strategy of investing in fast-growing companies ran aground when interest rates began to rise. The value of its holdings fell and within a year the fund was almost back to square one.

Fortunately, there has been a noticeable improvement recently, with an increase of around 25 percent in five years.

How can we deal with the inability to see credible future scenarios and at the same time invest successfully in the long term?

One option is to learn your own weaknesses.

This is the approach of Mick Dillon, who co-manages the Brown Advisory Global Leaders fund. Two weeks ago, he told me over breakfast that he and his co-manager Bertie Thomson keep a diary of their investment decisions – and then every three months they meet with a coach to analyse their decision-making.

For example, their coach noticed that when a stock price drops by 20 percent, Mick and Bertie usually write in their diaries that they should take action, but then don’t do it – and it turns out later that they should have.

So they made a rule that if a stock dropped by 20 percent, they had to take action: buy more or sell more.

They found this process of self-reflection so fruitful that they are now beginning to look at how and when their investment decisions affect outcomes.

For example, they noticed that they typically trade on Fridays and are now investigating whether they perform best at that time of the week.

Of course, most individual investors can’t get so far as to hire a behavioral finance coach. But journaling and reflecting on your own mistakes is free and can help you avoid repeating them.

Humility and learning to change is also a good option.

Chris Davies, co-manager of the Baillie Gifford European Growth Trust, openly admitted last month that he made mistakes in 2021, but he is determined to adapt his strategy to avoid making them again. He said: ‘We didn’t use all the tools that we had at our disposal that we could have used to help us ask a simple question: what is priced into share prices today?

“It’s about correcting an imbalance in the process. It forced us to look at the parts of our process that needed to be adjusted.”

A third option is to try to learn from history.

If you ever have the opportunity, I would highly recommend a visit to the Library of Mistakes in Edinburgh, or one of its branches elsewhere in the world.

It’s a free-to-use library dedicated to the study of financial history so that both professional and individual investors can avoid repeating the mistakes of the past. The challenges facing investors today may feel like uncharted territory, like the growth of AI or skyrocketing government debt. But a visit to the library reminds us that we’ve seen it all before, albeit in different guises.

A fourth option – also used by Mick Dillon – is to force yourself to think with a five-year horizon. It’s easy to get caught up in the problem that’s blocking your path – but what really matters is the long term.

This approach allowed Mick to buy companies like aircraft manufacturers during the pandemic, when flights were grounded, because he could imagine a longer-term future where things would look positive again, when others couldn’t see past the short-term obstacles to their success.

If all of these options seem like too much work, there are two easier options.

The first step is to find managers you trust who have done all the analysis themselves so you don’t have to.

And the second is to just buy everything. Don’t bet on a single outlook. Instead, bet on all options – seen and unseen.

In practical terms, this would mean investing in a well-diversified portfolio of companies across all sectors and regions. That way, you are as prepared as possible for whatever comes your way and are not dependent on a single outcome.

And the other advantage: it gives you more time to do the things you actually want to do. Like – in my case – wave jumping in the sea off Norfolk.

• What do YOU ​​do to protect yourself from investment blindspots? Let me know: rachel.rickard@mailonsunday.co.uk

Come on! Companies need to follow our advice

Businesses and regulators would save a lot of time – and households a lot of money – if they simply paid attention to Wealth & Personal Finance and its sister section Money Mail in Wednesday’s Ny Breaking.

In February last year I said in Wealth that the telecoms operator Ofcom should take tougher action against above-inflation rises in mid-contract broadband and mobile bills. It took until last week for Ofcom to do so. I know regulators like a long-winded consultation, but it could have saved households millions of pounds if they had taken action when we asked.

Meanwhile, millions of households saw their bills rise by around 17 percent in April. These increases would have been better off without them, as they came at a time when the cost of living was in crisis.

In May this year I wrote that Pret a Manger was keeping me and other customers away from their coffee and sandwiches because of the dual pricing model.

Pret’s subscription model meant that customers had to accept two prices for each item: the reasonable-sounding subscriber price and the comparatively ridiculous price that non-subscribers had to pay themselves, unless we forked over the equivalent of £360 a year to join the Pret Club.

Judging by the flood of reader feedback, I was clearly not the only one finding the dual pricing model hard to stomach. Last Thursday, Pret announced it was shutting down. Oh well, better late than never.

I’m curious to see how Pret does when it shifts the balance back to pleasing its casual customers like me, rather than catering to its most loyal customers. I understand that under the outbound model, subscribers transacted with Pret 28 times per month, compared to an average of twice per month among other customers.

In the meantime, I celebrate both results – with a delicious cheese sandwich.