Warning: There may be spoilers ahead …
1. “A Lannister always pays his debts.”
While this promise can have much darker undertones – especially when wielded by Lannister patriarch Tywin – here on The Value Perspective, we are merely looking for the businesses we invest in to live up to the more literally meaning.
Analysing the ability of a company to repay whatever level of debt it chooses to take on is an integral part of a value strategy as, in tough times, debt can prove a fatal chink in any business’s armour.
Like any Game of Thrones character, markets enjoy good times and suffer bad times and, because of this cyclicality, value investors are keenly aware that, sooner or later – oh yes – winter is coming.
As such, we put the balance sheets of potential and existing investments through stress-tests to ensure they are in a good position to withstand whatever adverse situations the market’s scriptwriters decide to throw their way.
2. “‘Valar Dohaeris’ – All men must serve. Faceless Men most of all.”
Our mention of ‘Faceless Men’ is not a slight on the management teams at the top of some of the world’s biggest companies but a reference to the mysterious cult of assassins, who worship the Many-Faced God – the god of death.
Faceless Men have the ability to take on the appearance of someone else – a skill Arya Stark uses to devastating effect, for example, when she transforms herself into Lord Walder Frey.
When value investors screen the market for cheap stocks, the ‘Faceless Men’ we need to beware are those that can cause permanent impairment of capital.
Our process aims to unmask businesses with the potential to harm our portfolios by asking such questions as: are the accounting profits that make the company look cheap a real reflection of the cash in the business; are there structural threats to the business that are not being priced correctly; and are there hidden liabilities that need to be taken into account in any valuation of the business?
3. “They’re laughing at us …”
While we are on the subject of the less than lovable Lord Frey, at one point he rallies his troops with the following line: “They’re laughing at us! All across the Riverlands, right down to King’s Landing, they’re laughing at us.”
When you follow a value investing strategy, you have to be prepared to adopt a contrarian mindset, no matter how tough it can feel to go against the crowd.
Not everyone is comfortable with that idea but accepting it can be hard to find bargains when everyone else is desperate to buy – and harder still to enter the market when everyone else is running for the hills – is a core attribute of value investing.
In short, you have to be willing to put up with people laughing at you in the belief that, well, you will end up having the last laugh.
4. “Everything before the word ‘but’ is horse s***”
Trust the Starks not to mince their words.
Still, while this was John Snow quoting the earthy wisdom of his father Ned Stark warning against those who start off looking to sugar the pill before trying to persuade you to do something you do not want to, the statement can be broadened out to mean: “Don’t believe everything you hear.”
This is a very important piece of advice as, in the world of investment, there can be a huge oversupply of information – of ‘noise’ – on any given subject at any given time.
Value investors prefer to focus their attention on audited accounts released by companies because – while you may still, from time to time, have to dig through some fairly pungent material – that is where we believe the truth ultimately lies.
Yes, there may well be some usable information to be gleaned from the transcripts of a company’s earnings calls, say, or other information released by a business but, the further you stray from the audited accounts, the greater the risk of your decisions being based on misinformation.
Value investors aim to take emotion out of the equation, to ignore the noise and to stick to their guns.
Or as Lord Varys would put it: “The storms come and go, the waves crash overhead, the big fish eat the little fish, and I keep on paddling.”
5. The slow but sure rise of Daenerys Targaryen
OK, so that is not a quote but the steady rise of Daenerys – from mere bargaining chip for her brother in the first series to contender for the Iron Throne by the end of the seventh – is one of the key storylines across the whole of Game of Thrones.
And explaining her resilience to John Snow, she asks: “Do you know what kept me standing through all those years in exile? Faith. Not in any gods. Not in myths and legends. In myself.”
Here on The Value Perspective, we suspect being able to call upon the services of a friendly dragon or three cannot have done any harm either but we are certainly with Daenerys on the faith front.
Value investors put a lot of faith in the ability of companies eventually to regain their earnings power when going through tough times.
And the gradual rise of Daenerys Targaryen shows how a patient approach and good assets – in her case, Dothraki hordes, a slave army and those dragons – can allow unloved yet solid enterprises to regain former glories and value investors to potentially profit as a result.
Important information
The views and opinions displayed are those of Ian Kelly, Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans and Simon Adler, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated. They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
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