An astronaut’s guide to value investing

A meaningful connection between value investing and space exploration is just one small step

 
Liam Nunn
Head of Research,​ Fund Manager​

Nasa’s long-awaited Artemis II mission has successfully completed its journey, with its crew of four travelling further into space than humans have ever ventured before. And if you don’t think we can find a connection between that and value investing, here on The Value Perspective, it is less a giant leap than – that’s right – one small step.

For while the main thrust of Colonel Chris Hadfield’s 2015 book An Astronaut’s Guide to Life on Earth, is that learning to think like an astronaut can help all of us thrive back down here on earth, the section that really caught our eye when we read it focused on attitude to risk. In it, Hadfield notes how astronauts can be stereotyped as daredevils, thrill-seekers and risk-takers yet the reality is completely different.

“Strapping yourself on top of what is essentially a large bomb is plenty risky – there is no need to up the ante,” he reasons. “I’ve never been interested in the just-for-the-hell-of-it rush of, say, bungee-jumping. If you’re an adrenaline junkie, I understand why you’d find that exciting. But I’m not and I don’t. To me, the only good reason to take a risk is that there’s a decent possibility of a reward that outweighs the hazard.”
 

Methodical and detail-orientated

That last line, of course, could come straight from The Value Perspective – indeed, as pieces such as Investment edges illustrate, such thinking is an integral part of our investment process. Furthermore, value investors often suffer from a similar misperception as astronauts – that because we often invest in what the wider market views as ‘beaten-up’ or struggling businesses, we are thrill-seeking risk-takers.
Like Hadfield, we would argue the misperceptions about our respective lines of work stem from how people think about risk. As he writes: “It’s almost comical that astronauts are stereotyped as daredevils and cowboys. As a rule, we are highly methodical and detail oriented. Our passion isn’t for thrills but for the grindstone and pressing our noses to it.

“We have to: we’re responsible for equipment that has cost taxpayers millions of dollars, and the best insurance we have on our lives is our own dedication to training. Studying, simulating, practising until responses become automatic – astronauts don’t do this only to fulfil Nasa’s requirements. Training is something we do to reduce the odds that we’ll die.”

Thankfully, of course, investment is not a life-or-death issue but, as professional investors, we are certainly responsible for people’s hard earned money and we are also big fans of tipping the odds in our favour. As such, we too are hugely dedicated to a process we believe will repay our investors’ faith in us – and it is a process that is not nearly as risky as many might think.
 

Significantly more risk-averse

It’s never easy or psychologically comfortable to swim against the tide of market sentiment, but rather than being risk-takers, most adherents to a fundamental value strategy would describe themselves as significantly more risk-averse than the average market participant. While any individual stock in a value portfolio might appear risky in isolation, history suggests buying the cheapest parts of the market on sensible valuations is actually a much less risky way to invest.

That’s because in the long run, we would argue the biggest risk in investing is overpaying for assets. As the father of value investing Benjamin Graham argued, the price paid for any investment should allow for a range of unexpected adverse outcomes – in other words, since many things can go wrong at once, it is prudent to be cautious. This is known as ‘margin of safety’ – a principle we would imagine Hadfield and the Artemis II crew would admire as much as we do.

In contrast to the adrenaline rush of short-term market trading, as long-term value investors, we find ourselves more naturally drawn to the patient, process-driven risk aversion of astronauts so neatly encapsulated in the full pre-launch dress rehearsal that delayed the initial Artemis II mission. As Hadfield concludes his section on risk: “Preparation is not only about managing external risks, but about limiting the likelihood that you’ll unwittingly add to them.”
 

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.