Investing can mess with your head.
The uncertainty. The volatility. The fear. The headlines. The geopolitics. The predictions of gloom and doom.
It's why I regularly say that investing well can probably be defined as 'the ability to successfully subdue parts of our evolutionary biology'.
To keep calm. To think long term. To do the right thing, even if the rewards are uncertain and a long way off.
If you want a microcosm of that very challenge, consider the now-aborted takeover of LNG driller Santos, by a consortium including an American PE mob and the Abu Dhabi national oil company.
In April, Santos Ltd (ASX: STO) shares were selling for as little as $5.34 a piece. By June, they'd rallied to $6.71.
Then, in mid-June this year, the takeover bid was announced, sending the shares to $7.72.
So far, so good.
The offer? $8.89 per share, conditional on certain subsequent outcomes, including due diligence.
What was an investor to do?
Today, we know the answer. But back then?
Well, the shares were trading at a nice premium to just before the offer, and a fair bit higher than the April lows.
But… there was another $1.17 per share on the table, if the deal went ahead.
Greed says "Wait for the extra money!"
Fear says "But what if the takeover doesn't go through?"
This time, it would have been sensible to listen to the devil on your shoulder.
But at other times, a deal like this does go through.
In the former case, hoping for more was costly.
But in the latter, selling too quickly can be equally costly, at least in terms of foregone profits.
I'll remind you, too, that you're probably reading the above words, unavoidably biased.
Because you knew what happened.
"Of course Santos shareholders should have sold at $7.72. Why take the chance?"
Now I want to refer you to a company you might remember from earlier this decade: Altium.
US giant Autodesk offered $38.50 for Altium when the shares were trading at $27.21.
In the aftermath of the offer, shares rose to $38.26.
That's a nice payday for shareholders. Should they have taken the deal, just as Santos shareholders should have?
Hold your answer.
That initial offer was knocked back by the company.
If you followed the company back then, you'd know a second offer, for $40 per share, which was also knocked back.
The shares fell by more than 10%.
Except, the story has a happy ending. Altium got a subsequent takeover offer, three years later, and it was acquired for $68.50 per share.
No, the two situations aren't exactly identical, but they're close enough to highlight the challenge of dealing with takeovers.
In the Santos case, shareholders should – with perfect hindsight – have taken the money.
But investors who sold their shares on market when the Altium share price got close to the initial takeover offer price missed out on a 78% upside.
Did I mention that investing was tough, and that takeovers are a concentrated microcosm of why?
And lest I point the finger only outwards, we've had mixed success with takeovers at the investing service I run, Motley Fool Share Advisor – for exactly the same reasons.
Turns out that – and I hope this isn't a shock – the future is uncertain and humans are fallible.
(Don't tell my son. He still thinks I'm largely infallible, though that fiction is seemingly unravelling quickly!)
So, I'm not here to give you a prescription for getting takeovers right. There is no formula (and beware anyone who tells you there is – they're either lying to themselves, or you, or both).
What I am going to tell you is two things:
First, investing is hard. You'll be wrong sometimes. I am, too.
Second, it's a game of probabilities. And probabilities aren't certainties.
Toss a (fair) coin enough times and the more you toss, the closer you'll get to 50:50 heads to tails.
Do it once, and you'll get 100% heads or 100% tails.
Do it three times, and you'll get either 100% heads, 67% heads or 33% heads… even though we know the statistical odds are 50:50.
Even with a loaded coin, you'll still get results that don't go your way sometimes.
My point? Even the best investors aren't right every time. And sometimes it's hard to distinguish correct from lucky.
(In case you're wondering, Santos shares fell almost 12% yesterday, after the deal was called off.)
And so?
And so, I want to encourage you to approach your investing probabilistically.
That is, I want you to do the things that put the odds as far in your favour as possible, but to accept that even then, things don't always work out.
That we shouldn't kick ourselves, or pretend that "I knew that'd happen".
Sorry… you didn't. That's your emotions talking. And messing with you.
We do it in all walks of life.
"I knew I should have woken up earlier"
"I knew he'd cheat on me"
"I knew I should have bought those shares instead of these ones"
No. You didn't.
You were worried about those outcomes but, because the future isn't clear, you made a judgement call and it just didn't work out.
Now, if you're late three days in a row, or three partners cheat on you, or if three companies you own shares in go broke, you might want to reconsider your choices!
But one instance? Sorry, that's just luck. And the same goes for good luck as for bad, too.
And you're going to have to make your peace with it.
Sometimes you do the right thing, and you still come a cropper.
Other times you get it all wrong… and still come out on top.
That's just investing. And the sooner you can accept it, the better.
(Oh, some people will offer to 'fix' it for you. My. advice? Run!)
As unsatisfying as it sounds, my best advice is to do the right thing as often as possible, knowing that sometimes you'll be wrong, sometimes you'll be unlucky but most of the time, it should work out in your favour.
And if you do that? Well, famed US investor Peter Lynch used to say that if you're 'good' at investing, you'll be right maybe 6 times out of 10… but those six times should be enough to build meaningful long term wealth.
Which… sounds pretty good to me.
Have a great weekend!
Fool on!
