I once vowed (or more likely I was encouraged!) to stop trying to squeeze tenuous analogies out of works of literature to relate them to experiences, characteristics or lessons learned in the discipline of value investing. But then, after recently reading Ernest Hemingway’s captivating short story ‘The Old Man and the Sea’ (whose publication ultimately led to him being awarded the Nobel Prize for Literature), I just couldn’t help myself, as the parallels to value investing abound, particularly the consistent, disciplined, patient and process-led approach employed by Schroders Global Value Team.

In Hemingway’s story, fisherman Santiago (the ‘Old man’), is down on his luck, having not caught a fish for 85 days, but nonetheless sets out early one morning in his skiff to try his chances. As the sun rises in the story, the parallels to our investment process kick in, as Santiago quickly observes how clustered and close to the shore the rest of the fishing boats are. In other words, the majority of participants in Santiago’s trade are (i) exhibiting herd-like behavior (literally fishing in the same pools as everyone else) and (ii) unwilling to do the hard work of leaving the nearshore and pushing into deeper water.

Going against the herd is exactly what we do in Schroders Global Value team, as our process guides us towards those segments of the market which are cheap and out of favour, having been overlooked by the majority of market participants who seek the benchmark-hugging ‘safety in numbers’ of doing what everyone else is doing, and are either unwilling, or unable, to stray too far from those market segments most in favour. While going against the herd may sound easy in theory, in practice it’s a lot harder, as there are typically multiple reasons which at face value ‘explain’ why the cheapest stocks in the market trade on such low multiples (perhaps relating to their growth, cyclicality, leadership, balance sheets, or some combination of these issues), and it’s our job to do the hard work of separating the hidden gems from the value traps. In other words, it requires considerable effort and determination to push into both deeper value for investors, and deeper water for Santiago.

Santiago doesn’t simply rely on luck in his efforts to secure a catch, with factors tilting the odds in his favour including his significant skill and experience, and the disciplined process he follows when lowering his fishing lines. Indeed, Hemingway explains that “he kept them straighter than anyone did, so that at each level in the darkness of the stream there would be a bait waiting exactly where he wished it to be for any fish that swam there”. By contrast, other fisherman in the story let their lines drift with the current, having no idea of the precise depths at which their bait are waiting, simply relying on luck for their bait drifting to where the fish may bite. As Santiago thinks to himself “it is better to be lucky. But I would rather be exact. Then when luck comes you are ready”.

This interaction between a disciplined investment process and luck is something we’re confronted with every day as value investors, as we can’t claim (or even realistically hope) to make the right investment decision 100% of the time. The market is a complex adaptive system, and sometimes we will have made the ‘right’ investment call with foresight (i.e. with the information available at the time), only to see our hopes dashed by bad luck for a poor ultimate investment outcome, and equivalently (but hopefully far less frequently) we may make the ‘wrong’ call, but see this offset by good luck and a decent investment return. Over the passage of time, however, the repeatability and consistency of our process should ultimately stack the odds in our favour such that, to paraphrase Santiago, ‘when luck comes, we are ready’. (To be clear, though, reliance on luck is not part of our investment process!).

As the story of The Old Man and the Sea progresses, Santiago’s qualities of patience, discipline and stoicism come into play, initially as he drifts further out to sea without a catch to his name, and then even when he eventually feels a pull on one of his fishing lines as a result of a marlin taking his bait ‘one hundred fathoms down’. Indeed, Santiago’s travails while the marlin is hooked form the bulk of the story, as the huge fish pulls Santiago and his skiff further out to sea, moves between depths which such strength and speed as to damage Santiago’s boat and fishing equipment, and essentially engages in a desperate tug of war over several days and nights before an exhausted Santiago eventually harpoons the fish and straps it to his boat. At his darkest hour, Santiago even mutters “fish … I’ll stay with you until I’m dead”.

While that’s hopefully more extreme than the lengths Schroders Global Value Team will go to in order to see an investment thesis play out, doing what we do does require significant levels of patience and discipline, as it can often take several years for a business to turn itself around, either operationally or in terms of the valuation awarded to it by the market, and there have been multi-year periods in the recent past when the entire style of value investing has fallen deeply out of favour and underperformed the broader market significantly over those periods. It’s during those toughest times when value investors’ true colors are revealed, and within Schroders Global Value Team we will stay consistently and unapologetically true to our process, continuing to invest in only the cheapest segments of the market, even if value investing as a style stays out of favour for multiple years. To be able to do this requires a team of investors with a contrarian streak, which by definition makes us different to the average stock market participant, although perhaps not quite as ‘different’ as Santiago characterises himself to his friend: “I told him I was a strange man … now is when I must prove it”.

No analogy is perfect, however, and as Hemingway’s story draws to a close, Santiago’s luck turns against him, as during the process of towing the marlin back to shore, his catch garners attention from increasingly aggressive groups of sharks, eventually leaving Santiago towing nothing but the skeleton of the marlin to the shore. There actually is a continuation of the analogy here, in that Santiago essentially got too greedy via fishing in such deep water that he ultimately couldn’t get his catch back to shore before those pesky sharks became aware of his success. As Santiago mournfully acknowledges (to the marlin!), “I shouldn’t have gone out so far, fish … neither for you nor for me”.

In Schroders Global Value Team, our process seeks to ensure that we’re never too greedy, either in terms of the initial multiples we pay as we initiate a position, or the actions we take when a stock has appreciated to our estimate of fair value, as to do so would diminish our value credentials, risk style drift, and see us trying to capture other factors beyond our key value-based competencies. Unlike Santiago, who didn’t realise (or was unwilling to acknowledge) that it was time to move on (a decision which cost him dearly), we will never venture outside of our circles of competence, either in terms of the stocks we consider as part of our idea generation process, or the margin of safety we require from holdings in our portfolios. By contrast, Santiago, despite his best intentions, was fishing in the right pool but without the disciplined process to ensure he made the most of it.