As odd as it may seem, a recent decision by SARS reminded me of some useful investment principles. This must be evidence that I am a true investor, given the highly unusual source of this inspiration!
On 23 November 2021, SARS announced that it extended the deadline for submitting tax returns for the 2021 tax season from 23 November 2021 to 2 December 2021 for non-provisional taxpayers. In addition, the date for levying penalties for late filing has been moved to January 2022. The reasoning for these decisions refers to systemic issues at the tax authority and the impact of load-shedding on taxpayers.
This must have been a difficult decision to make, as it reflects the inherent conflict between two guiding principles of fairness that we all have to deal with on a regular basis, namely –
- fairness (or equality before the law in this case) means that we should treat all people the same, irrespective of who they are; and
- being fair to everyone means that we sometimes have to treat different people differently to allow for their circumstances.
Violating either of these principles can lead to unintended consequences. If we treat all people differently, there are effectively no rules and the result is anarchy and chaos. For example, think about the consequences if currently compliant taxpayers see this decision by SARS as licence to submit their tax returns late in future without penalty. By contrast, if we treat all people exactly the same, the result is that sound general principles may lead to gross individual unfairness. For example, a rule that determines that everyone must use the stairs to reduce power usage by the elevators, is obviously harmful to the rights of those with physical challenges. Consequently, applying fairness involves a delicate balancing act. Overemphasising one or the other of the above principles will lead to negative outcomes.
Analogously, investors must also balance the same principles of fairness in their investment portfolios. When we have suffered a loss on an investment position in the past, we tend to lean towards to first principle of fairness. In other words, for investments that are not currently in the portfolio we apply our investment rules far too narrowly that we miss operational turning points and the new opportunities that these create. By contrast, when a portfolio position has existed for a long time, we often lean towards the second principle of fairness. Practically, this means that we justify the position, even though it currently violates a number of our investment principles. In truth, much has been written about these biases, referring to them by various names. Therefore, it is important to admit that we will never find the perfect balance. However, recognising these potential failings in an investment process is also the first step to implementing checks and balances to counteract them.
Practically, this means that we should have procedures in place whereby we critically evaluate our current investment portfolio and the reasons behind its composition. At a basic level, we should be asking:
- For potential positions: would an investor who has never come across this investment before be interested in taking a position?
- For current positions: if we did not hold the current position today (we had zero), would we be comfortable in creating the same exposure in the investment portfolio?
At 36ONE, we recognise the importance of asking these questions and the value that they add to investment decisions. In this respect, we believe that a number of characteristics of our firm and investment approach are critical to achieving balance between the fairness principles in our investment portfolios. Firstly, we have a flat investment team structure, as greater equality gives individual analysts and portfolio managers authority to challenge the decisions of those around them. Secondly, we assign secondary analysts to sectors and firms as a second voice in all investment decisions. Thirdly, we allow analysts the freedom to roam outside their designated sector if they choose, which frequently provides a useful “outsider” point of view. Finally, we have regular and ad hoc reviews of investment portfolios where all members of the investment team are encouraged to voice their opinions and challenge portfolio positions.
As we will never completely eliminate all biases from an investment process, the best way to ensure satisfactory investment outcomes is to make the right questions an integral part of the investment process. We believe that at 36ONE we have done exactly that.
“To ask the right question is already half the solution of a problem.” — Carl Jung