Guacamole, data and your gut

The following article appeared in the Australian Financial Review on June 18, 2018.

It’s January 2009. The world’s financial markets are coughing up blood and, capitalist that I am, I’m looking in every direction for opportunities. I’m also looking for an excuse to eat at one of my favourite restaurants, Chipotle Mexican Grill, so I rally two other investors to join me for some “due diligence”.

We order our food, sit down and begin feasting. It’s not long into the meal, though, when one of the other dinner-goers remarks that they don’t like Chipotle’s guacamole, and thus they’d never invest in the company.

I was taken aback. I didn’t own the shares but Chipotle’s business had been on fire. The store-level economics were very impressive and operating profit was up almost 17 per cent in 2008, which was incredible considering they were selling expensive burritos during the worst recession in nearly a century. Even if the guacamole had tasted like slime, it sure hadn’t mattered in the grand scheme by any measurable standard.

“I don’t care. I trust my gut on these kinds of things. If I don’t like a product, I won’t invest.” the person said.

Chipotle’s shares are since up over 700 per cent. So much for not liking the guacamole.

Don’t get me wrong: having a profound customer or user experience can put an investor on to an idea that may turn out to be a winner. For example, my love of Amazon as a customer helped to pique my interest in the shares, which has worked out nicely.

Still, trusting our gut or experience only goes so far. For example, while Chipotle has always been delicious to me, its shares are almost 40 per cent below their all-time highs because the share price got ahead of itself and the company dropped the ball on food safety. Had I blindly invested at some point because I loved the guacamole, I might be sitting on a massive loss.

Our own preferences and internal senses can betray us even when they seem crystal clear. Whenever someone says they trust their gut rather than data, I can’t help but recall that none of us can feel that the earth is spinning on its axis and hurtling through space at 108,000 kilometres per hour.

Out of step

It’s important to prioritise hard, relevant data over our own personal views. This is easier said than done, though, because it often means admitting you were wrong or that your tastes are out of step.

For example, when I first heard about Afterpay, I dismissed the product as one that didn’t solve any problems for users or merchants. In hindsight, it was me that was out of touch, not the business that would become Afterpay Touch. Fortunately, I did end up swallowing my pride and coming around after the company’s torrid growth had beaten my intuition into submission.

Examples abound. Look down your nose at McDonald’s? Me too, but the company just reported its best same-store sales performance in six years and the shares delivered a total return of 92 per cent over the past three years. Turns out most people still just want decent food quickly and at a good price.

Think there will always be demand for physical books? Me too, but America’s one-time largest bookseller, Barnes & Noble, has closed 30 per cent of its bookstores since the turn of the century. One of its biggest rivals, Borders Group, went bankrupt in 2011. Whether I love the feel of a page has little to do with overall book sales and even less to do with the low-margin, capital-hungry nature of big-box retail.

The moral of the story: eat where you like, pay how you like and read what you like. But don’t confuse those preferences with those of others. When it comes to investing, let the data overrule your gut.

Joe Magyer is the chief investment officer of Lakehouse Capital. He and the Lakehouse Global Growth Fund owns shares in Amazon. The Lakehouse Small Companies Fund owns shares of Afterpay Touch. This article contains general investment advice only (under AFSL 400691).