The London South East, Investing Matters Podcast Episode 10, Algy Hall, award-winning former IC financial journalist

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Peter Higgins 00:17

Hello, and welcome to the London South East Investing Matters Podcast. My name is Peter Higgins. And today I have the pleasure of speaking with Algy Hall, the former associate editor of the Investors Chronicle Magazine, the award-winning journalist, and he's now moving on to pastures new, I'm going to talk about that in a little while to Citywire.

But first and foremost, Algy I want to talk about on an almost personal front, really, with regards to the fact that not a lot of people know that you're also a famous author and write children’s books. We need to get this out of the way mate because you come from a large family and got children of your own, but people are like what animation and animates books, he writes books, but you've done loads of books mate!

Algy Hall 01:04

To sound famous in that world, maybe pushing it a bit!

Peter Higgins 01:09

I think you are come on how many books have you done now? Eight, nine, ten?

Algy Hall 01:13

I think it's actually I've had I've got eleven published books. And I think they're in seven countries. But um, yeah, fame and fortune has not followed. Exactly. But my is something I love doing it is actually what got me into journalism in the first place.

Because I had studied strangely economics and politics as an aspiring illustrator, then what does an aspiring illustrator study, but economics and politics if it was my was my, my choice, I had studied that at university, but um, I was trying to pursue an illustration career and I got a part time job with them. Someone called Lawrence Leathem a fantastic journalist who just stopped editing the Financial Mail on Sunday in we had a TV production company, and I got that job so that I could fund my illustration work.

But he kind of saw my background and then quickly sucked me into researching for his own investment portfolio, and writing for his newsletter that that he had at the time.

And then I got involved with it was 1999 the dot com boom. And it was wonderful, because I got involved with setting up probably one of the very few, extremely successful dot com to get established then which was Citywire, which is the company that I'm going to rejoin, so as actually the first ever employee to join Citywire. And now after 15 years away from there and going back, I've just started back.

Peter Higgins 02:41

That's absolutely phenomenal, man. I mean, it's fantastic that you're going back to Citywire, and we'll touch on that a bit later. It's quite topical, that you study politics. We're talking about animation now, Spitting Image is back, surely, you're going to write something or do something animated to do with our politicians and what's going on right now?

Algy Hall 02:59

I tried that, you sometimes think, oh, yeah, I could blend these things fantastically. And, um, I tried that soon after university and quickly discovered I was terrible at political cartoons. I just about managed to be able to caricature politicians.

But my jokes were hopeless, convoluted, completely, like, you know, really not funny, they were awful. So yeah, that is something that I had kind of knocked on the head. And likewise, I also after the credit crunch, and the great financial crisis, I got very excited about doing a children's book, revolving around apple pie and bad apples. And one bad apple kind of makes all the restaurants and I had all these ideas and I tried to come up with a picture book, which by that time I was getting published, my publisher was very keen on the idea and so was I.

And my output was terrible. Trying to force these ideas into a picture but proved to be disastrous. So anyway, that was about six months of hard work totally wasted. I've learned you know, I've got to stick with what actually works and comes naturally rather than kind of trying to force two things together, which look like they should be able to work together. But um, yeah, I don't have the talent to blend.

Peter Higgins 04:22

But one thing you do have a talent for is writing good copy and fantastic journalism with regards to investors. And you know, and I've said it before, you know, all the books that you've written, the children's books have led you to be touring around the world, USA and elsewhere regarding that, so you are a writer mate with high regard, so don't knock it, you know.

Algy Hall 04:42

Thank you very much.

Peter Higgins 04:43

Let's just hit this on the other nail here now, right? 21. Right. You're in your 15th year (ish) of being at IC, you've won the CFA Award Algy right, the CFA UK Journalist of the Year Award. Now, first and foremost, we need to tell people, you need to explain to people, what the CFA stands for and the sheer size of it and the competition that you were up against?

Algy Hall 05:09

So yeah, no, Peter. Well, I mean, it's a really big organisation. But I think I should say, first of all, one of the things which made me so delighted to win that award, and obviously, for me, it was always a really big one. And some of the people I really admired won that journalism prize in the past, but um, the award itself is judged blind.

So there's no bias, as far as I understand. So it's kind of really special to win it because people are judging you on your writing. You're right. It's a massive association. I think you represent something like 11,000 delegates, and these are professionals who have studied for their CFA exams, which are incredibly rigorous and hard. I'm currently trying to get one of their smaller qualifications in ESG.

So I've got I'm studying for three weeks to try and get that. And the telephone book sized amount of material I'm learning. Just yeah, tells me I don't want to actually ever try and get the level three CFA.

But yeah, the kind of rigour that they apply to everything, I think it's, you know, wonderful. And also, you know, they, they're really focused on this kind of really thoughtful work from academia and industry and looking at how that can make people better investors. And in obviously, they're applying that to professionals.

But I think for private investors, there's a huge amounts that private investors can take from those kind of firm, very thoughtful bits of research that are available to everyone. Also, it's marvellous, everyone can access them, even though some of them are quite heavy going. They're written, you know, for professional audience. But the insights they offer, often really quite simple, but incredibly powerful, in terms of making private investors, you know, better at what they're trying to do.

Peter Higgins 06:56

And for me the importance of what you've done previously, and continues to do and the importance of the CFA. And what we're trying to do here at London South East and Investing Matters. It's about education, it's about making investors better.

Yeah. And you've touched on something there, which I'm going to, we're going to talk a bit more about that the award in the article that would taming your brain a bit bit later on. But I wanted to touch on something you've already touched on just there. And about ESG, which everyone's talking about now. You know, Net Zero targets and decarbonisation, etc. And I want to ask you a couple of questions, right. Net Zero targets a prominent in corporate language of many companies currently. Yeah. And over the one of the last articles that you wrote for Investors Chronicle, you raise a brilliant question in that, is there value in corporate virtue signalling? So let me just give us your thoughts on that. Because a lot of it's going on at the moment, isn't it?

Algy Hall 07:53

Yeah, no, I mean, um, I think the research looking at Harvard, I think that is does some Harvard, Harvard Business School does a lot of really fascinating work. And it was something on this subject, you know, something which could come out of there. And I mean, basically, you know, what it what it was saying is that, in the short-term, it kind of been greenwashing kind of, you know, shouting about it virtue signalling actually does look like it can have a positive effect on the share prices. But over the long term, it's the substance which bears out.

And I mean, I think this is really important to understanding where you can create value through looking at these kinds of ESG type factors, because it's very popular, so people are paying attention to it. And they're not necessarily understanding what the value behind ESG is.

So that's why you know, virtue signalling can work in the short term, or they just gonna feel you know, your share price is just going to fall back down when you found that, but the really important thing is that you've got a real risk there.

The fact is that there are very clear goals set for things like climate change, and also the analysis, which identifies problems, if those goals aren't met, then you know, there's very serious in depth analysis and the consequences, incredibly costly, basically, you know, measured in the 10s of trillions of dollars. So, you know, it's a very real problem, and they're very real solutions required. And part of that is going to be the regulation of firms.

So whilst we've got, you know, it kind of miniscule carbon price at the moment, and then very, very little greenhouse gas output is subject to, you know, carbon pricing and stuff like that at the moment. There's clearly a big pressure to start to take those kind of external costs of companies and put them back on the companies as the companies are able to cope. So you know, there's obviously it's a transition so you can't just do it all in one fell swoop. The regulator has to move as the, you know, company as a moving scene as carrot and stick all of that. But these costs, which historically, no one's had to think about, because they've been, you know, someone else's problem, they're going to come back and bite companies probably.

And so if companies aren't on the front foot in addressing all of these risks, and opportunities to with opportunities in that, but they, you know, they, they could get into a lot of trouble. And that's where, you know, the investment, the investment side of it comes in, it's like, you know, is the company that I'm looking to invest in? Does it face some of these risks? And is it taking care of it? And is it just giving some flan rather than dealing with, you know, the really meaty, important stuff, and I think the popular company with private investors in particular is boohoo, which obviously got caught out in terms of its manufacturing, and what was going on in its supply chain, which is very local, and very immediate. And we've seen a lot of fallout from that. And also, you know, with these fast fashion chains, we've just had a report about lots of dump clothes being found in a desert in Chile, you know, there are endless problems, and it's something that investors just increasingly going to have to think about. And they're gonna have to think about the real substance, which is hard at the moment, because we haven't got standardised ways to measure this stuff, which is, you know, accounts, I think, personally, are a huge problem for private investors, because they're less and less informative. Because an ESG is one part of that, you know, you can't see what should be priced in or what you may want to be pricing in through accounts. Although there's action to change that at the moment, which is interesting.

Peter Higgins 11:45

It's brilliant. You touch on that, because that's part of my next two questions, and I'll get them both at the same time, it can break them down as you wish, I think you've covered some of them already. And the main question I wanted to ask regarding the ESG, or to where is sustainability part of the company's fundamentals is one, right? And for investors, how can ESG credential be made easier to understand prior to investing in i.e., Boohoo (BOO) or Royal Dutch Shell (SHEL)? And, you know, the mining companies? Because the me as you said, in the RNS’s, isn't the information that's put out there, Algy, it's not clear cut as to how much are they investing? How much have they got to offset regarding the charges that are coming down the pipe, there's not enough clarity for investors to actually say, actually, I want to be an ESG investor, I want to be ethical in my investing. And here's a really good company. And I'm going to invest in it. Because there's so green.

Algy Hall 12:38

I suppose you said that a few different things. One, just if we go back to, you know, is sustainability part of fundamentals, there's something kind of very hard in terms of, you know, how we have to think about the answer to that question.

Because I'd say yes, because of what I was saying, because it's going to be forced on, you know, on companies and therefore on investors. So, you know, from that perspective, yes. But when we don't know, you know, there's a lot of consternation about the foot dragging of regulators as his dissatisfaction, whenever we have the COP meeting, stuff like that more should be done. It's not happening quickly enough.

But then again, a lot is happening. But so it's kind of like when these kind of external costs are going to be brought home, I think is one of those can really vexing questions, because until they do, or until a company is found out, and we don't know, you know, what there is to find out about them a lot of the time, then it's not a problem, but then suddenly, you know, like, you have Volkswagen diesel gate, and I think a $14 billion fine, or whatever it was, and the end of the diesel industry, you know, they can become very material, and then that that issue of like, what's the material?

I mean, that's kind of the second part of your question, in a way, you know, how can private investors understand ESG?

I think, you know, I mean, it is a question of what's financially material. And that's very hard. There's been a lot of work done now, which has been going on for some time to try and identify for different industries and different companies. What are the material factors that, you know, investors need to look at? And like last year, I mean, a lot of these organisations have been coming together anyway. And then last year at the COP 26, Glasgow Summit Meeting, whatever the correct term is, that there was a whole load of these groups came together again, to form something called the International Sustainability Standards Board, which importantly, is part of the IFRS.

So the main accounting, standard setting body and I think you know, what we'll see fairly soon actually, because so many of the standards were in in place. Is there will be standards, which companies will be expected to adopt in their accounts, which will suddenly start to make things a lot more visible.

And one of the approaches I personally really like in terms of making it visible to shareholders is actually putting a monetary value on the external benefits. And I mean, this is imprecise, obviously, they're going to be huge flaws, you know, being talked about, the more people try and do this, but actually putting a monetary value on the cost to the world, which isn't a direct cost, and the benefit, which we're not seeing as a direct benefit from each company.

And I think in doing that, it's going to start to really explain the risks which are out there it is, you know, just monetizing stuff.

Yeah, sorry, that's a terrible word. I've never used that in my raising money a man. It's just like, there's I think is invented about, you know, five years ago, that word or something fun you ever started using? I promised myself I'd never use it.

I think I'm behind the times now. Yeah, so actually actually talking about these things in terms of you know, how much money it is externalities per share, let's say, you know, and then also looking at funds in terms of, okay, what's the cost of the planet in this fund? For every pound invested? The cost is x per year? And how much is you know, how much does that cost moving by? How much is that benefit moving, but you know, these, this just tells us stuff, which is intuitive, and it's imperfect. But I think what private investors really need, and also financial advisors, and you know, those kind of intermediaries, I think it's something really intuitive to just explain what's actually happening.

Because saying, a company has an ESG score of XYZ, I just don't that many different ratings agencies and people don't understand it. And people don't understand things like, you know, how can an oil company be in an ESG fund?

And I mean, you know, plenty of reasons why it can, but it seems counterintuitive, but you know, we all need oil, and that industry is massively important to the world. But we need it to become greener. And we need it to do what it does in a better way, and move into clean energy and everything.

But it's you know, we've got to understand that it has an massively important place in the world, and therefore in our, you know, in our investments, and it's a case of doing better, but it seems like completely counterintuitive, like, you know, you can't say that's ESG it must be wrong.

But um, and then sorry, I'm being long winded. But there was one other thing in terms of private investors understanding ESG. And I think, actually, it's the most exciting kind of part of it is, rather than looking at the risk, is just to look at companies, which are creating opportunities, which we can look at, in the same way we'd look at any company at trying to exploit an opportunity, you know, does it have a sustainable competitive advantage in the area?

Is that, you know, is the market and market growing? What does the competition look like? Does it have pricing power? Is it making, you know, strong margins, all those kinds of things we'd look at for any business case, we can apply to, you know, this is a kind of green growth story, or, you know, this is the kind of growth story around improving people's lives, you know, development or you know, those kinds of things. And actually, it just fits into the framework we're used to, it just so happens that it's kind of linked to some of these massive trends, which are establishing themselves around the kind of transition to being a green of global economy.

Peter Higgins 18:51

Indeed, I mean, obviously, the poster child of the green economy at the moment is Tesla and electric vehicles going forward. But there's been lots of discussions about Tesla and the sustainability of and also needing of lithium, and now you've got companies that are talking about clean lithium, which is clean mining of lithium in the extraction process. And you know, the valuation of Tesla at the moment, people just scratching their heads going, who really, you know, if they sell all the vehicles that they're planning to sell, that's 1 million pounds per car. It's like, at what point do you say that the ESG credentials of Tesla is beyond what it actually should be? You know?

Algy Hall 19:29

I mean, there's obviously the hype cycle around, because I mean, the, you know, clean tech did capture that zeitgeist, which we've kind of we kind of saw peak last year of early stage companies, which were going to deliver whatever and I mean, obviously, you know, with Tesla, you kind of you turn it into a software company.

Now the cars are just you know, that this is getting the hardware into the market, then full automation. Does that mean they can drive ridiculous amount of miles, it's kind of like a fleet which will last for ages which just run software off is you know, Are they kind of vision in any way?

Who knows, I mean, so many people are trying to get into that market, we'll see how it plays out, I think you can go, you can go to those extremes of kind like the really, you know, the hot stuff, always you're going to get overvaluation, because that's psychology, I had a whole load of great boring companies coming up in stock screens that I was running, I think Macfarlane was one, which is a niche packaging, sourcing and distribution company, which I think it's actually got slightly hot recently, since it's just like, such a boring company, this company is come slightly cyclical, and it kind of like does lots of bolt ons, and it occasionally needs money from, you know, shareholders rather than fine, you know, being able to finance all of its stuff, but it's got this lovely niche market, which just just makes good money from in the valuation.

As a consequence, when I looked at it, you know, really good value compared to, you know, just as dull story, it's got and sorry, I should, I should have said, the packaging has, there's a green element to it, because everything is doing is trying to make things you know, greener, because that's the name of the game at the moment.

So this whole story is, you know, it's all kind of plays all over the place, rather than just in the can write names that we've all heard of, which is so exciting. I mean, don't get me wrong, I think, you know, you look at companies like Tesla, and Nvidia and you know, other other ones like that. Any just saying, Oh, my goodness, this is just like, amazing, mind blowing. But that's why you overpay for it, or on average.

Peter Higgins 21:37

On average. Absolutely. And that just runs almost seamlessly into where we're gonna go with this actual conversation Algy. And obviously, we want to touch on it. You won the CFA UK journalists of the Year Award for the article, which is Tame the Brain, or Tame Your brain. And you just took some the first element of it there, overconfidence. So we're talking this segment here, Algy about the article, yeah, which won the award, and talk a little bit about, you know, the other stuff that I do is all about educating people, all the stuff that you've done historically, it's about educating investors and making them better. So wanted to focus now, on that article and the different elements of that article?

We're going to go through them one at a time, if that's okay with you. And I want to start really, with what can investors do to overcome their behavioural mistakes? My mistakes? Yeah. And start firstly, with overconfidence, why do we all you know, we read a little bit about something, and it's like, oh, Tesla's gonna go to the moon. So therefore, I'm gonna have to buy it. We've all made these mistakes. It's so common.

Algy Hall 22:41

Yeah. I mean, I suppose one of the things to understand about all the biases and yeah, the article that we're talking about, there are five key biases, which I thought were most important to highlight. But there's a flip side to these biases. And that really, in terms of rational decision making, and investing, especially, they're really not great, they can cause us loads of problems. But in terms of our everyday life, that brilliant, you know, they're there for a reason. So it's combining investing as well.

Oh, no overconfidence. But if you're not overconfident, you're in trouble. We're all overconfident for a reason we come back, we make false assessments, because it serves us really well, in terms of just, you know, getting by every day, I wouldn't be sitting down and talking to you and being recorded if I didn't have a sense of overconfidence, you know, because there's all the questions, I could ask myself the rational questions, I'd go and hide underneath my bedclothes.

So it's really important, but I'm over competence. I think I think one of the really useful insights into it for people is basically just breaking it down to three things, which is we all think that we're better than we are, we're able to be more precise when we're kind of predicting things and making decisions than is feasible in any way. And we all think we're better in comparison to other people than we actually are.

And these are lovely, comforting things. When we when we believe them, that we can totally believe them. So I you know, and I'm part of this as I, you know, I'm saying this, and I don't think it applies to me as much as it does and listening to this, and Peter, you're listening to this, and you're thinking it doesn't apply to you as much as it does. And that's because we're human, we can't help it. So um, we have to undo this in a way. And the other thing which is really important, actually with overconfidence for investors, I think is the role that information plays because then we kind of get drunk on information.

The more we have, the more we think we know. And actually there's there's evidence that it's we just become more overconfident and And there's one really great experiment from the 1970s when a great psychologist called Paul Slovic, but horse handicappers, can people who predict horse races. And he got he just gave them five bits of information said, What do you think the outcome to these races would be to their races which had been wrapped around real information. And they gave their predictions, they weren't bad. And they said how confident they were. And their level of confidence kind of matched their accuracy. And he gave them five more bits of information progressively till they get to 40 bits of information, like confidence in their predictions went up and up and up and up, and the actual quality of the predictions stayed through.

And as investors, we have access to so much information, we can become completely overconfident. Because we think we know everything. And it's a case of concentrating on the really important salient facts, which are going to determine the outcome of our investments. That's what's really important and not to get completely lost in that forest of information.

Focus it, because you know, information is valuable. And research is incredibly valuable. This isn't me saying, Don't do any research, because it's not worth it. It's saying make sure you know, you know how that research fits into what you actually want. So, you know, just having that very clear focus of, you know, where am I going to get my advantage from? And what do I need to know? And then building on that.

Peter Higgins 26:30

Thank you for that you've given given me the, the problem, and you've also given me the solution there. So thank you ever so much for that Algy.

Obviously, you've touched on a little bit, but it's expanded a bit on the confirmation bias side of that. Yeah, talking about your information. I'm one for just research and until there's nothing left to read, you know, and I think yes, got it now. And I filtered it down, down to that one stock, and that's going to go, that's going my Hail Mary one you know, so yeah, expand on it a little bit on confirmation bias. And we'll touch on the endowment effect a little later.

Algy Hall 27:02

Oh, yeah. Yeah, no, they'd say, yeah, confirmation bias, this is just that we kind of would like to look at information which increase with us, we can kind of handle straw man arguments, which we can let you know, knocked down. But you'll notice it if you if you kind of it kind of like looking at certain news articles kind of thing. And know, you know, if you if you use Twitter, and you've managed to get a diverse feed together, and you know, look at what you're not clicking on, you're clicking on, you'll always avoid this stuff, which is kind of challenges your opinion, and be far more likely to read something which supports your opinion, this is kind of part of, you know, protecting ourselves and comforting ourselves and being able to make firm decisions.

That's what helps us in life, but obviously investing, we've got a deal in probabilities. And so we have to know, the counter argument, I saw Charlie Munger quote from somewhere the other day about, you need to know your opponent's argument better than you know, than your opponent does. If you're to know that you've got an actual case yourself kind of thing.

But yeah, what we do is the exact opposite, we just kind of like shield ourselves from the counter argument, because it's, you know, it's very hard to get, you know, takes huge amounts of energy to engage with a counter argument. And, actually, you know, see if, you know, you can knock it down, or whether it's gonna knock you down. And it's hard that you have to be horribly honest with yourself.

But yeah, I mean, it's, you know, it's incredibly important to be able to do that. Because otherwise, when the share price is falling, or when bad news comes out, you won't actually understand it or see it. So you have to put yourself in the situation that when something bad happens with a stock that you're holding, you're going to recognise it and be able to be honest about it.

And then that that'll help you react to it. And a lot of investing is reacting to the, you know, stuff that we can never anticipate happening. So we might as well kind of try and get as many steps ahead of that process as possible, because it'll help you know what we do.

I mean, there's also something one of the biggest kind of lessons about confirmation bias probably comes from a book called Superforecasting by someone called Philip Tetlock is another amazing psychologist. And he basically runs these super forecasters competitions to understand what makes someone very good at forecasting and the ability to change one's mind incrementally in sometimes I think massively and very often that's what is one of the defining features of a super forecasters he you know, he terms and so I'm just having that mental agility to kind of like jettison ideas and thoughts and you know, if there's something better that comes along, can be incredibly powerful, but obviously you need a framework that you're operating inside so you don't flip flop because flip flopping is also no good.

Peter Higgins 29:57

Also, and prove very, very expensive as well, you know, just compounding losers.

Algy Hall 30:04

I mean, yeah, buy high sell low. I mean is basically what we do is that, you know, obviously we're meant to do the opposite. I remember when I started if I you know go why is everyone always buying at the top and selling at the bottom and there's kind of a you got to go through a cycle then you understand exactly why it's that huge compulsion.

Peter Higgins 30:26

Absolutely no, that's brilliant answer. Thank you for that Algy. So we're moving on now to the endowment effect. Why do most of us struggle with this Algy? Is so commonplace.

Algy Hall 30:37

Yeah, no, no, no, it's just a simple thing, which again, endless experiments into if we own something, it's more valuable, suddenly, all these things also kind of linked, as well, because we can kind of see how, having talked about confirmation bias how that's gonna work. I mean, ownership is kind of like, that is, you know, an expression of belief kind of thing, if you're gonna, like, put a kind of cherry on the cake of your confirmation bias buy the thing.

So, so yeah, I mean, yeah, but also, I mean, Endowment Effect is actually quite interesting, because there's a dynamic to it.

So if we own something, and it does well , the amount of love we feel towards an attachment increases, initially, by buying it, we kind of, we like it more than we should, but then if it does, actually does, well, we like it more and more and more, we're going, you know, going to get blind and blinded to the, you know, reasons not to hold it.

On the flip side, if it starts doing badly, and badly enough, at least, we're going to start hating it more than we should. So this is a, you know, the capitulation that you get, which contrarians tried to take advantage of. And also, there's been research into the way fund managers, you know, sell shares, which suggests this is very true, that, you know, there's a point where people just become price insensitive sellers.

So, you know, the analysis goes out the window, it's just like, this thing is rubbish. Obviously, you know, sometimes companies can be complete rubbish, and you know, they're going bankrupt. So selling any price isn't always, you know, stupid by any means. But we just psychologically, we get caught in this trap, where we become sellers at any price.

Because of the come, you know, Ying and Yang of this endowment effect. I'd say also, as a journalist, in some ways written about kind of individual shares for a long time, I think one of the things which perhaps were underappreciated for is that we're not allowed to own the things we write about, which kind of reduces the bias, because we give opinions a lot of the time, that creates another type of endowment effect, which is kind of partly serving the market to give to give opinions, and it does play a useful role.

But it does compromise our bias in itself, but not owning it is a big virtue in terms of analysing it, and providing research to our readers, which is essentially what kind of share analysis fits that, you know, I used to convey the C in the Investors Chronicle, that was what it was all about, really, kind of, you know, trying to get investors further along in the process. And, you know, I tried to try to dodge the main Endowment Effect bullet, I think was, you know, always a big advantage.

Peter Higgins 33:24

I think, came out for me with all the team at IC was the level of objectivity. And I think that's really important, as some of that's lost, I think, out there because almost everyone's writing a blog now. And the reason why they're choosing to write a blog about that particular company, is because they've already had the endowment effect, they love it so much I want to write, I want to shout from the rooftops about it. And here's my blog about this company, that the seven steps as to why you should buy it as well, you know, so that happens so often. And you see, and The IC wouldn't do that, you know.

Algy Hall 33:55

That can be that huge value in the kind of research and reasons given by an owner for owning something.

But at the same time, it has to be viewed in that context, because there's no way of doing that kind of writing without the bias of ownership, which is a big one, all these biases are reinforcing.

But I mean, there's, you know, there's great stuff out there on blogs, in terms of, you know, the kind of thinking behind investments, but I think, you know, if you're reading them, you obviously have to bear in mind this is someone who owns the shares so they're sold on it.

Now, how do I kind of take myself out of that and try and be objective as well, but it can be used because you know, you can take the arguments and try and put yourself in the position of shooting them down, and then see where you get and then you know may if they will stand up based on your own research and researching the counterpoints, then you know, you can create something valuable for yourself from you know, as long as you know what you're reading is coming from in the first place. You have to be wise to what's going on inside your own head. You have to anticipate it and mitigated in advance with whatever process you use.

Peter Higgins 35:04

I absolutely agree with you I think also the could be another little caveat and credential there in the sense of the person has a disclosure at the bottom of the article, I own the shares, the person at the same seminar says, I own the shares, you know that as full disclosure, I don't think enough of that sometimes Algy.

Algy Hall 35:21

Yeah, in journalism, there's basically very high standards and all that kind of stuff. So I mean, I'm going to be biased. I do think journalism is a good place to look at because it has developed over a long period of time. And you know, the profession has discovered the mistakes that are made. And also the dangers of you know, obviously, you know, what you really don't want is a dishonest actor, you know, the pump and dump merchant. That's the kind of like really serious bad stuff that can happen You know, if you own something, you should always disclose it.

That should be the minimum bar that you set yourself. If you want to be seen as having integrity by your audience, I'd say you know, you just got to say, I own it. That's the context you have to read this piece in and now these are my kind of honest views.

Peter Higgins 36:12

Yeah, I completely agree with you.

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Peter Higgins 36:33

Now, the plastic of plastics now we're going to go to loss aversion. No one likes to sell when it's losing, but they can't sell when it's winning.

You know, it's going to go higher. Difficulty I, you know, I've been doing this investing and trading large now for nearly 30 years, Algy and I struggled with it so much. You touched on it there about capitulation, it's almost until it gets to the point of capitulation. For most of us, it's just like, we go, oh, you know, we throw the towel in.

Algy Hall 37:00

There's something about making losses, which just kind of, normally a spoken man in terms of his you know, twice the amount of pain from the losses and the pleasure from a gain, which is the kind of classic Kahneman and Tversky finding from Prospect Theory, I think it was called, but we just don't want to hand handle losses. And also, I think there's an element of, you know, they're just too hard to engage with. So people look away. And also, there's that kind of desperate feeling of, you know, if I sell now, and it's happened to everyone, if I sell now, well, this share or this fund, whatever it is, just jump up in the other direction.

So yeah, all of the remedies to these biases, is basically taking yourself away from your emotional reaction into space, or, you know, a framework, a process, where you can just be analytical. And so, um, loss aversion, if you've got a framework, if you, you know, for analysing where you are with an investment, if you knew what you were looking for in it initially. And you know, you can retest those, those presumptions, then you can kind of come, you know, you should be able to come to a better decision. And now, you know, you can create kind of pillars, that, you know, your investment are built is built on. And, you know, you because everyone can say, oh, yeah, you know, the shares are cheaper now, you know, surely they're a better bargain.

But if one of your, if you've got the kind of like one pillar, that whole cases based on, you know, two pillars, and one of them's just been knocked down, then it's like, well take it on the chin, maybe it will go back up, maybe it won't. I mean, because none of us can predict share prices, it's totally unpredictable. So it's kind of like, you know, you've got to base it on what you can actually, you can actually see, you can actually observe.

Peter Higgins 38:53

I think there's that famous Goldman Sachs saying that those that predict or try to say that they can't forecast everything. And eating glass. Remember that phrase? I'm the crystal ball. You know, those of us first of all, end up eating glass. So yeah, I think that's the phrase. So the last one now, outcome bias. We've already we already know the outcome. We've done the research, we've put our money down, we bought the share, the fund, whatever. And we already know it's going to be a roaring success.

Algy Hall 39:20

I think it's really interesting at the moment, we're also something called hindsight bias as well, because we've had an amazing spectacle in the market recently in terms of high risk assets, just taking off and doing amazingly well outcome bias actually, what it is judging the quality of a decision based on the outcome that's so if let's say you've invested in you know, you're the takeover king Peter, you've had loads of takeovers in your portfolio, and we know which is actually a very good way of assessing you know, what something's actually worth, you know, value.

But um, so maybe this is a that's a bad example. But let's say you have something and then like the shares have gone up, you know, they're doubled, tripled something spectacular. And then you were to just say, I made a great decision, because the shares have, you know, done that. And you were ignoring the fact that basically everything that you had kind of written down in the first place I'm going to invest for these three reasons.

None of them happened there was complete. And you're going Yes. And yeah, I mean, they celebrate. But the thing is, when in our in our heads, we always think it's a reflection of the decision we made.

Peter Higgins 40:35

Algy, I’m going to interrupt you there, you made such a brilliant point there, because I've got about three or four examples in my portfolio right now that done that. Yeah. And I'm like, Oh oh, it hasn’t happened yet, but okay.

Algy Hall 40:51

If you were holding for one reason, and then there's actually you that was wrong, but you're just, you know, the basis of your decision changes, I mean, fine. So I mean, there's lots of different ways, the outcome bias is the thinking that the outcome reflects the quality of decision.

And also, even if the decision makings evolved along the way is kind of right to think that it's, you know, wherever the decision can make, just taking the output and equating it with the input can be very wrong.

But also, we have hindsight bias, which has come back similar in some ways, and probably is more salient to the kind of markets we've seen, which is, everything looks more predictable once it's happened. So the way our brain constructs, you know, explains the world is to construct narratives. And once something's happened, it's very easy to construct a coherent narrative.

So if that's coupled with some really amazing price performance, we kind of naturally assume what's happened will carry on happening, what's true in the moment, based on our analysis of the past is going to be true in the future. And that can lead to kind of all kinds of horrible errors and, you know, buying the hot stories, basically. And, and, you know, not not realising that they're not quite as great as say, you know, seem in the moment.

So and I think there's, you know, there's a lot of that, I mean, that there's a downside to that which you say ghastly, which is happening at the moment. So it's something to really watch out for what am I actually buying here. Don't hop onto bandwagons. Unless you've got a very good reason that you've come to based on the framework that you're using, or the you know, whatever your investment style is.

Peter Higgins 42:40

Very good point, then very well made as well Algy. I want to touch on very quickly. 2002 Nobel Memorial Prize in Economic Science winner, Daniel Kahneman said why it's important to think fast and slow Algy, because we tend to be obviously survival instincts, and we were from caveman, etc. But this is a difficulty. And one of the things that we struggle with is doing precisely that thinking faster, and slow.

Algy Hall 43:08

When I was writing the piece, we're talking about the most intuitive way I came to, you know, thinking about and trying to explain it is the kind of thinking flow, which is combine rational analytical thinking is so tiring.

If we're doing it the whole time, and this is the point in his book makes, if we're doing it the whole time, we wouldn't get anywhere. So we need these kinds of, you know, we need all these biases we talked about just to get through the day, our brains amazing, it's just like shortcut shortcut shortcut. And you can do loads of stuff with it.

But yeah, occasionally, if you want to make a good decision, and think rationally, you have to come like take yourself out of that. And you have to, you know, apply the painstaking effort to come by actually making a decision.

Even inside, you know, when we're researching stuff, it's easy to come just like, you know, even though like you know, we're doing hard work in terms of finding out lots of information stuff, it's easy to apply it fast, or you know, can't write lazily if he wants to tell me he's not lazy because it's just easy, another kind of process, but it's easy to come back, just skip the effort for bit of an quite tedious bit of kind of, you know, categorising, and you know, putting it in inside a framework, which makes all of that work valuable. So, um, we just have to check ourselves if we want to get the best results from ourselves and from from our efforts, and Daniel Kahneman I always say carnem, and I sure I'm wrong. I've got such a stupid name and I always pronounced everyone else's name completely wrong. So apologies.

Peter Higgins 44:50

No apology required. Algy. I mean, the thing is, about thinking fast and slow. And one of the one of the things that you've developed over the past fifteen years and you've, you're now in the process of writing a book about it as well, is about stock screen analogy. So, first of all, tell me why you developed it in the first place. And it's worked fantastically, the performance has outperformed most benchmarks. Right. And then secondly, tell us a little bit about the forthcoming book of, of what will be now your 12th book, by the look of it, you know.

Algy Hall 45:20

One of the slightly different names, I don't think many kids are going to be reading this 12th one.

Peter Higgins 45:29

Don't know they're getting into investing younger and younger now Algy.

Algy Hall 45:31

That's true is true. Yes. So you know, the stock screening column was I can take no credit for the genesis of it. It was Jonathan Eley, the editor of The Investors Chronicle at the time, said I want to stock screening column. And then several of us who are going to work on it was was the idea but is something that I've always had a huge fondness for. And it goes it goes back to when I read Jimmy O’Shaughnessy’s book What Works on Wall Street, right at the start of my career, kind of around, you know, late 90s, early 2000s I forgotten when it was, but um, he's kind of, you know, use quant methods he back tested to kind of create screens, my screens have always leant on recognised styles and, you know, back tests and stuff, but then tried to take it further to what does this all actually mean? How can we get closer to just a handful of stocks, which are going to hopefully, you know, you have some good ideas amongst them.

But anyway, so we started that column kind of over 10 years ago. And quickly, it became clear, I was the one who was really enthusiastic about it, and everyone else had better things to do. So with gusto, I kind of took it over, at first, and it's early days is kind of putting together a whole load of screens to run the magazine. And probably there quite a few overlapping ideas, and some ideas, which will week, which I've kind of gradually got rid of or tried, because I obviously had I'm not doing it anymore. I tried not to get rid of the ideas, which were poorly performing.

But were interesting. But I'm sure you know, in terms of the screens, which exists now there is some kind of you know, there's survivorship bias in terms of, you know, I've kind of got rid of ones which are underperforming, which may or may have had merit to continue kind of thing. So I'm obviously you know, everyone's biased in terms of you know, his outcome bias in terms of, you know, you look less favourably on a skip screen, which has underperformed and you know as dubious kind of thing. There's sometimes for good reason, sometimes just because the style isn't in vogue. But anyway, the book, really what I wanted to do is just focus on, essentially there kind of five main styles at play in the screen, but there is across the, you know, about 40 screens. But when I really thought about it, I thought you could bring it down to four styles, which were kind of really, you know, you could explain through the academic research, through the psychology, through fitness, statistical findings, things like that.

And also the fifth style, which was gross at a reasonable price. Probably, you know, if you knew about the other four, the other four was really informing what was going on with that one. So I couldn't really see a case for you for presenting growth at a reasonable price. But so um, the books face, which I'm still I'm still doing the edits on actually is focus, I don't know when it's gonna be out. It was August this year originally. So I've ended up focusing on quality, which is obviously like very in vogue at the moment. And you know, there there is a danger, I think a genuine danger that it's kind of got a bit hot, just in terms of, you know, if you look at the trajectory of valuation of that type of stock through through the screen screens that I've run into, but also it's true, the portfolios have excellent fund managers who follow that style, there has been a massive rewriting in that area.

They said it's quality, looks at momentum, but I'm probably kind of more broad base and just price momentum, which is well known. So but say concentrating on earnings upgrades as being a big thing. And I do think earning upgrades have become more interesting over the past couple of decades because we've got this whole thing with them intangible investments, which basically produce a different type of growth for companies in that kind of growth is far more likely to prompt larger upgrades, you know, all larger changes in broker expectations over longer periods of time, just because of the way successful intangible investment tends to manifest itself.

There's also value contrarian value, obviously, you know, people hate value at the moment or is, you know, maybe they're warming to a better now, but it's underperformed in terms of the classic value style for 15 years. But the screen that I've followed is outperformed by a lot over 10 years, which, you know, covers that period.

And I think one of the big differentiators between the way I'm explaining value is that again, it goes back to intangibles intangibles have meant a lot of I mean, they've made accounts really hard to interpret, and the profit number in particular. So the metric I use is my main measure of value bypasses profit, it just looks at sales, which has other there are other reasons to look at sales, which, you know, is too long winded to go into now. But um, basically, intangibles have really given value investors who look at book value and profits, they've given them loads of wrong signals. And there's there's one really interesting value fund, which just looks at free cash flow. For valuation in the States, it's actually an ETF called Distillate Capital.

And they found with their with their measures of intangibles that the growth index, MSCI growth index, was actually cheaper than the value index for the most of the last decade. So that which just speaks to how weird accounts are at the moment. And, you know, is that which is terrible for private investors, because, you know, private investors rely on information being presented in those documents more than a professional investor with the massive research department and you know, making endless adjustments. So, what have we had quality momentum value, and then the last one is dividends investing, which is kind of like a distinction from income investing, which I kind of feel like slightly ends up chasing, you know, chasing high yield for the sake of it.

So dividend investing is the process of identifying dull overlooked companies, essentially. So you just use the dividend and the beta to gather it's a classic way to do it. But then there's a whole load of other tests just to you know, check that the dullness really is if there is something being overlooked or not.

Peter Higgins 52:37

Brilliant, thank you ever so much for the coverage of that, and I'm gonna really cheeky now, Algy, right. You've mentioned quality dividends, contrary value momentum. Yeah. And I may have missed one of the but regarding your book, and obviously what people to go out and buy it, obviously, one that you've you've seen over the past 10 years, 15 years, which have performed the best. Can you give us any clue as to what's this, what strategy for your screening process is performed?

Algy Hall 53:03

And the quality strategy is the one which is kind of way out there.

Peter Higgins 53:08

I just wanted to make sure that we covered that in the sense of I think what's happening now is and we've touched on it in this interview, and conversation is that people chase trends. It will change whatever's going up. And nobody wants to stop that they're at near or towards its 52. Week low. They want to buy it near its 52. week high or multi year high. So I'm always looking and thinking, what is that? Why is everyone suddenly hating on that stock? And that piques my interest? And I know it piques your interest as well.

Algy Hall 53:36

Yeah, then I would say I wouldn't put any stop by what strategies performed best in the past. And it's important that they have performed well, because that tells you there's a value in doing it. But um, yeah, I mean, these these things switch around all the time.

So you know, in a way it's getting, there's momentum and strategies as well as there's momentum in stock prices, you're not wrong to follow what's doing well. But equally, there's drawdown in strategies in the same way as as drawdown come like whiplash type drawdown in strategies the same way as theirs and stock prices. So if something's really hot, you could just be at one of those whiplash moments. So if you want to stand the best chance of doing well, you have to invest in a way that appeals to you on a very personal level.

I think. So and you know, and I think, hopefully, going through four really quite different strategies in this book is going to mean there's something there, which readers are going to be able to say, yeah, I think that suits me. And also that is going to give the broader understanding. You know, there are lots of things which work you know, this like, you don't have to find the one thing just find a thing in investing, and that you know, which works for you and it actually, you know, has it has some kind of, you know, common sense in track record, which suggests that, if I stick to this over time I'm going to do all right.

Peter Higgins 55:02

Brilliant Algy. We've run through all my questions mate, we've covered every single thing absolutely in depth.

It's been an absolute delight to speak to you, for our Investing Matter's audience. That was me Peter Higgins speaking with Algy Hall, former associate editor of Investors Chronicle, the author, award winning journalist and the first employee of Citywire, who's going to return into Citywire and as returned to Citywire, Algy, it's been absolute delight speaking to you mate, love your work.

And I'm looking forward to speaking to you again soon hopefully, and wishing you all the very best with your new book, which will be coming out as a great Christmas present. It'll be on my buyer list as well mate. So I want to wish you all the very best and success with the family as well.

Algy Hall 55:44

Thank you so much. It's been brilliant. Thank you.

Peter Higgins 55:48

Thank you Algy.

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