Stock in Focus / Hunting for optimism

News of Manchester United’s failed acquisition by Qatari Sheikh Jassim piqued my interest at the start of this week. It reminded me of the troubled tale of Nick Train’s investment in the company (which is listed in the US) and the difficulty buy and hold investors like Train (and me) have in calling time on their investments. Incidentally, I have never sold a share.

Thus, I decided I would write about the psychological challenges of pressing the sell button. I am afflicted by confirmation bias (that stocks that I own are the best ones) and perhaps this offers a window into my own fear of change. All interesting (although arguably over personal) stuff.

But when I ran this idea past a colleague, he suggested that my newsletters had spent too many weeks focusing on negative aspects of investing. ‘Perhaps’, he said, ‘the readers would like you to start pointing out some opportunities’.

He’s right, of course.

Bad news is fun to write and to read, but in the grand scheme of things, we want our readers to be enthused by the stock market and not overwhelmed by negativity. And so I set my sights on an investment story that could help reignite some optimism among our community. One that could perhaps offer them evidence of opportunities to profit in the current challenging environment.

And then I started watching the new Netflix documentary on David Beckham and I have ended up back at Manchester United.

But this time, my focus is definitely more a positive one. Because the Netflix documentary - which starts at the beginning of Beckham’s career at the club - offers at interesting lesson for investors: the importance of a good culture.

Beckham joined Man U in 1992 when he was just 17. His footballing prowess and relationship with ‘a Spice Girl’ (one of the highest profile bands in the world at the time) gave him something of a hero status among England fans. And so when he was sent off in the last 16 of the 1998 World Cup, those fans over-reacted. The documentary shows clips from the 1998/99 domestic season where Beckham received weekly death threats and hanged effigies in Beckham t-shirts were not uncommon. And it also shows the support of a club which rallied around ‘one of their own’. The culture that Alex Ferguson had fostered at Manchester United meant Beckham was able to thrive on the pitch, despite the intensely negative media attention. The players (many of whom spent their whole careers at United) and staff were a family. Even the receptionist at the ticket office was at the club for more than 50 years.

And success followed. Under Ferguson’s tenure, Man U won 38 trophies, including 13 Premier Leagues, five FA Cups, and two Champions League titles. As a Spurs fan that makes for painful writing. But the lesson is there. A motivated, supported workforce delivers results.

We see it in business too. My favourite business book (To PIxar and Beyond) chronicles the years leading to Pixar’s successful IPO, the release of its first feature length film Toy Story in 1995 and its highly profitable partnership with Walt Disney. The author (then finance director of the company Lawrence Levy) recalls remarking to his wife soon after joining the company that he had never “seen so much talent under one roof”.

Keeping hold of that talent, nurturing and rewarding it ensured the company thrived. When Pixar joined Nasdaq, the entire staff were offered options which allowed them to share in the success of the IPO and subsequent share price growth. Pixar listed at $22 on 29 November 1995 and by the end of its first day of trading, the shares were worth $39, giving the company a market capitalisation of $1.5bn. By the time it was acquired by Disney just over a decade later it was worth $7.4bn.

The trouble for investors is that ‘culture’ is not an especially easy metric to identify. Share schemes, invested management and a willingness to engage with shareholders is a good starting point. I have noticed this in FTSE giant Relx whose management are never afraid of engaging with shareholders and answering questions. The company has been a phenomenal success story and remains an attractive investment (for those with the stomach for the lofty price tag).

And then there is Quartix, whose fortunes (and share price) collapsed after the company’s heavily invested founder retired a few years ago. Following last week’s profit warning (detailed in this instalment of the SCVR) Andy Walters has resumed his role in the business. Quartix is a high quality operator, with a seemingly excellent culture, currently going through a tough time. The reaction to last week’s profit warning is a symptom of the difficulties currently facing small companies listed in the UK. Perhaps the company’s recent challenges could provide investors with an opportunity at a rare slice of a real gem.

An optimistic note to end on. But for anyone who would have been more interested in an article about selling culture, don’t worry, Ed has written on the subject this week.