What do you know that the company doesn’t?

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Some investors will blame anyone but themselves for their stock picks gone wrong.

In a way it’s understandable. It’s very human for a start.

But also the dirty secret of investing is there’s a lot of randomness involved. Good luck and bad luck.

And some people find the role of luck hard to accept.

I believe the best investors are those who tilt the odds in their favour sufficiently to enjoy more winners than losers.

To envious onlookers, though, they may just seem outrageously fortunate.

In contrast, the worst investors see certainty everywhere – and then tend to look for villains when their shares inexplicably go south.

Market manipulators! Central bankers! Short sellers! Lying company managers!

That last one is a particular bugbear of mine.

I don’t mean the lying managers – though I’m hardly a cheerleader for them – but rather investors who expect too much precision from managers in the first place.

Falling short of earnings expectations or entering a recession with a weaker-than-ideal balance sheet is not damning proof of deceitful management.

Predictably pointless

Missing earnings guidance also infuriates the analysts who cover companies and issue buy and sell ratings.

So very often a big earnings miss will see the share price tank the next day.

The cry goes out: “Management lied to us three months ago when they said they saw orders ticking up! Now we can’t trust a word they say.”

Yes, occasionally executives do outright lie.

Fraud happens.

But far more often the miss is down to excessive optimism, poor judgement, the normal ups and downs of business, or just a company’s own bad luck.

Yet so allergic are investors to earnings misses, firms strive to smooth their returns and issue low-bar targets. Then they can aim to always slightly beat expectations.

It’s a ridiculous game that has nothing to do with actually running a business.

Moreover this ruse doesn’t really work anymore.

Surprises will always happen – yet investors are now so used to being spoon-fed soft targets that I’d argue they go even crazier today than they would if they’d always been given it straight.

Mystic mugs

Anyone who has studied business for a long time – or even better run one – knows that s…tuff happens.

Projects overrun. Products miss the mark. Warehouses get snarled because two key employees freakishly got ill at the same time. Something burns down or explodes.

Or maybe the external environment changes. Interest rates rise, or the weather is awful. There’s very little company executives can do about that.

Meanwhile even the best-paid economists have a dire track record of predicting economic upsets. Luckily for them, their salary is not dependent upon a share price that’s quoted daily on the stock market.

Yet despite the long-demonstrated difficulty of making accurate economic forecasts, some investors still expect their managers to be both excellent stewards of a business and at the same time economic clairvoyants.

That’s totally unrealistic.

All good disciples of Foolish investing know short-term prediction is a mug’s game. It’s also not important, in our opinion, compared to focussing on the big picture – growing sales, profits, and share prices over the long-term.

If you must look for managers who can see into the future, at least look for those who can see ten years ahead. Not those who – apparently – have a strong hunch about next month.

Great expectations

Ultimately, investors railing against companies that miss their earnings expectations are expecting executives to do their job for them.

That’s because in theory everything that is already agreed upon and known –forecasts for sales and profits, the launch of a new product, the economic backdrop, interest rates – is already in the price when you buy.

If you want to beat the market, you need to perceive something different.

For a very few – think George Soros – this might be a big macro-economic event.

Perhaps you’re skilled at reading political runes and foresaw Russia’s invasion of Ukraine? Or you’re especially in tune with the global economy, and you were confident interest rates would go higher than most people believed?

Do this repeatedly then you will end up rich. But I’ve never seen it.

Most of us have no chance at beating the market based on macro-economic guesses. Expert fund managers and their staffs of PhDs running billions watch macro indicators like hawks. The chances you will see what they’re missing are slim.

When it comes to individual stock picking, however, I believe we might just see something different.

Perhaps we’re extra confident about the growth of a particular market – electric vehicles a decade ago, say, or artificial intelligence a couple of years ago.

Or maybe we judge that a particular company has stumbled into a huge opportunity that even its management haven’t yet grasped.

Rollouts of new consumer products or services can be especially fruitful here.

Or maybe we see the opposite?

A restaurant chain that has lost its buzz with the in-crowd perhaps, or a company making a product that still dominates an area you judge has little room left to grow – but executives who’ve spent their working lives in a sector can’t see it.

I’d argue big energy companies were in that latter spot 20 years ago, incidentally.

See different

In these cases, you may have a perspective that is not shared by the market. It might affect the next earnings report, or the balance sheet in a decade.

Either way, if you’re right about your non-consensus view then you might be seeing something that is not currently baked into the share price.

That is our opportunity.

Legendary hedge fund manager Michael Steinhardt coined a term for this.

Variant perception, Steinhardt called it.

What do you see that others do not? What do you anticipate that even the company’s managers are missing?

For Foolish individual investors, I’d argue our most durable advantage – a long time horizon – is itself a form of variant perception.

When you’re thinking about how a company will develop over the next 10-20 years and the market is fretting about the next six months, then you’re automatically seeing things differently. And that, Fools, is where the profits are.

The post What do you know that the company doesn’t? appeared first on The Motley Fool UK.

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