Heart of cold
This Valentine’s Day our star-crossed multi-asset funds assistant manager, Will McIntosh-Whyte, re-examines a stock that threatens to 'be the one'.
It’s hard to see faults in the love of your life. You see all the good: funny, successful, good-looking, independent. That high-pitched laugh that turns into a snort is just so cute. You somehow miss that their flat is always a mess – that dippy disorganisation is part of the charm, right? And they’re not that bad when drunk (most nights of the week); you’re sure they’ll grow out of it.
When you are in love you bore all your friends talking about how great things are – the moon-lit walks, the spontaneous flowers or gifts (your friends privately see this as a big red flag). Maybe you even start to change yourself – suddenly there’s more designer gear in the wardrobe or you develop a keen interest in the opera. It’s all good when it’s good. Then suddenly something changes. That cute little laugh grates on your ears like a hyena choking on a bone, the old-milk smell in their flat is unbearable, and you really don’t want to spend another Friday night at La traviata.
Yes, falling in love with someone – anything – is a dangerous thing. This is especially true when it’s a stock. There is no more expensive accessory for an investor than rose-tinted glasses. How many times have you heard the phrase ‘once the darling of the markets’, as another profit warning comes like a bunch of guilt-ridden flowers, leaving investors struggling to remember why they still hold the company. Think Vodafone, Asos, Valeant, WPP, to name just a few. Most heart-breaking of all, you may find out your partner has been living a double life, a la Enron.
I find myself regularly talking to clients about certain names in the portfolio. One of which is Alphabet, where I have to constantly remind myself not to fall in love. A company with fantastic growth that is a primary beneficiary of the worldwide shift to online spending that rolls on regardless of the ebb and flow of economics. Alphabet has a strong balance sheet, and a market-leading position to the point where its search engine has become a verb.
And then it has that funny ‘little’ research lab X Developments – a ‘Moonshot Factory’ aiming to produce ground-breaking new technologies, including Artificial Intelligence and kites that can generate electricity from wind. It produced Waymo, a business with the potential to dominate the autonomous car market – or does it, and these other moonshots, just end up a drain on capital resource not generating any returns? It has that successful YouTube business, outrageously popular with millennials, but that might just come back to haunt the company if it fails to properly police uploads. And what about that attractive monopoly position in web searches that’s seemingly indomitable – does it just make them the company a target for regulators?
No stock should ever be considered ‘the one’. They should be thoroughly researched on an on-going basis under bright, unflattering lights. Consensus needs to be challenged, risks thoroughly thought through, and positions sized appropriately. Of course the advantage with a stock is a sensible portfolio manager can diversify – this is more difficult to do in your love life.
So this Valentine’s night remember to do your due diligence on your investments (if not your loved ones). I’ll be at the desk rerunning the sell case on Alphabet to avoid confirmation bias.