Have you ever had a conversation with someone who has a very different perspective on things to you? More on topic, how often have you made these people see things your way? Introducing something new to a person often results in them rejecting it for what they already know – which leads us to our question – how do you tell someone they need something they have never had a need for before?
Theories known as self-affirmation and cultural cognition guide the natural human behaviour of sticking to what we know. These social theories speak to thoughts that are so deeply embedded in our emotions that they cannot be changed purely by logic, facts and reason. People need to feel something about the proposed change in mindset, something that they like, in order to change their opinion. However, as their mind is subconsciously fighting to cling to what they know, showing people a better alternative which they can accept emotionally, is often very difficult.
Trust is something that is earned (to quote a famous South African asset manager). The resultant question; who trusts management of companies? This is a worrying question, and one that is relatively prevalent in society. But it doesn’t stop us investing in shares, despite the consequences shady management can have on the value of these shares. Should it stop us? Maybe – but how else could we grow our money at a rate which exceeds inflation?
Investment professionals have come up with a number of strategies to mitigate the potential effects of mismanagement hurting individual returns. These strategies however are not foolproof, often expensive, are not always available to all investors or reduce returns over the long term. Examples include diversification via an index vs concentration in top quality companies with relatively predictable returns / good growth potential – for a debate on this look at Warren Buffett’s returns over time vs the S&P500, with his strategy of owning more than 50% of his share portfolio in 4 to 6 companies. Warren Buffett’s mentor – Benjamin Graham – states as one of his 3 most important rules: “Avoid suffering irreversible losses”. Nothing causes irreversible losses like accounting and management fraud (major regulatory action, major social backlash, etc.).
Unfortunately for us, we don’t have the same access to business executives and business operations as Warren Buffett, and therefore we are far more reliant on publicly available information. When this information turns out to be wrong, our investments suffer, especially those of a concentrated portfolio – even more so if the event impacts multiple companies in the same industry (think collusion). As this often happens to over valued companies, this exacerbates the impact on our portfolio’s as a whole.
An insurance product for this risk allows investors to construct more concentrated portfolios and potentially achieve returns more similar to Warren Buffett’s early years, while negating the risk that we are fully reliant on publicly available information only. InvestSure developed such a product - all it needed was an insurance company willing to risk insuring a share – which we found through Compass Insure.
The challenge for us, InvestSure, is to show that not only on basis of fact, but also in a way that you can relate to, that if you want to invest in individual shares, you need to insure this risk. Could you have predicted Steinhoff, Enron, Capitec, VW or EOH? You can’t predict the industry, let alone the company, that will be affected next. There is no pattern. Insure yourself, insure your shares. They could well be the most valuable asset that you own – best protect them.