Animal Spirit Unleashed & Investors’ Duties
In his General Theory, John Maynard Keynes declared that:
“[o]ur decisions to do something […] can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.“ (ch 12, VII).
And as managers are trying their best to steer the troubled waters, investors are getting a hard time assessing value with such high-level of incertitude and pessimism — which is often self-fulfilling as noted by Keynes. These conditions are producing raising disconnection of prices from rational bases. Our decisions may be driven by our animal spirits in normal times, it is clear that they are today. Investors’ animal spirits are unleashed.
During such a crisis, we want to share indeed three convictions as investors:
- It is paramount to beware of judging things by their appearances. During such times, panic and speculation (defined here as the activity of forecasting the psychology of the market) are largely taking over the activity of forecasting the prospective yield of assets over their whole life. This results in largely mispriced assets, which is very good news for faithful, disciplined investors.
- We do this job because we believe it is not meant to be an extractive activity, but on the contrary, be value-creating. We wouldn’t have chosen this path if it was bereft of values and usefulness. Finance is about trying to bring more order into our messy, noisy world, bearing some of the risks off the shoulders of managers and helping them get more resources and use them as efficiently as possible along the way (especially on private markets). When chaos is climaxing, investors may be tempted to (a) lose their nerve, (making hasty decisions or/and bothering unproductively entrepreneurs), (b) get paralyzed, (c) leverage their bargaining power to take benefit from entrepreneurs. We think on contrary it is the moment when investors should be as useful and contributive as they can be. It does not mean that very profitable deals cannot be done, nor does it mean that deals should not factor in the risks taken. But they should never be done at the expense of companies and entrepreneurs; deals should be designed fairly and done in good faith. It’s our role to play.
- History shows us that it is a very good moment to be investing. Funds raised during crises or just after show generally good performance (because entry prices are often lowered and priced returned to the means when these companies IPO or get acquired. Also, legendaries companies are built during crises (and many tech titans are born during these times). Some of them, prepared by Hadrien Comte just for you:
Credit: photo by John Cameron on Unsplash
