4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows:

Sir Humphrey : “The Queen is inseparable from the Church of England”

Hacker: “What about God?”

Sir Humphrey: “I think he’s what is known as an optional extra”.

Sir Humphrey explains that a “modernist” is a coded word.

“When they stop believing in God they call themselves modernists”.

Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you based on the empirical evidence that you see.


By contrast, faith is a great liberator. The more improbable something is, the deeper the faith required to accept it. Faith is not based on reason. Consequently, behaviour driven by extreme faith often looks like irrationality or worse to outsiders.

For this reason belief is an essential tool of investment while faith is a menace.

It is often difficult to distinguish one’s own beliefs from what might loosely be called wishful thinking. It is quite natural, but not good, to suffer from confirmation bias when hearing news about a company in which one has already taken the decision to invest. Confirmation bias is a symptom of faith. Not merely in investment but in all aspects of life we are keen and competitive to be clever and right and successful.

I find it remarkable how hard it can sometimes be to work out what I actually believe. I would like to think that my beliefs frequently coincide with what turns out to be the truth but the relationship between belief and truth is neither necessary nor sufficient. Something does not have to be true for me to believe it and if it is true there is no guarantee that I will regard it as such. My personal tree of knowledge bends in the gales of news and opinions that swirl around us all.


But I found that once I no longer worked for a stockbroker it was easier to attempt a dispassionate view. When you publicly analyze a stock market-listed company there is inherent pressure to be generous and it comes from all sides. The companies give some privileged access to analysts – not insider information but the chance to meet managers and to view production sites – and it can be uncomfortable to pronounce that their efforts amount to a “sell” recommendation. One’s own corporate bankers can (and did) complain because they might want to win business from the company. And institutional investors themselves favour buy recommendations because if they are interested in a company it normally means that they already own the shares.

It was quite a shock for me to have to decide what I really believed. Once the surprise wore off it became a pleasure and almost a privilege. It’s not only stockbrokers who feel under pressure to adopt particular views. Conformity is all around us, in the workplace and even at play and at home. Your boss is always right, your children are unusually bright and your football team is by far the greatest that the world has ever seen. Who needs religion when you exhibit faith like that every day?

Everyone has at some time experienced unexpectedly being asked what they think about something. Unless we have a instinctive response (because we have already thought about it) we will be inclined to answer in a way that pleases or at least appeases our interrogator. There is no point in arguing if you don’t know what you believe and you will never really believe anything until you have been persuaded by some evidence.

Evidence is the basis of probability. It looks like a duck, it walks like a duck and it sounds like a duck. Let’s go with the theory that it’s a duck. Most people would say that it is a fact that it’s a duck. But we don’t need to go there. The world be less argumentative and more productive if we used the phrase “scientific theory” rather than “scientific fact”. Give me an example of an undisputed scientific fact and I will show you a dead end where thought has dried up and scepticism is treated with hostility.


I hold shares in slightly more than fifty companies. I must have liked each of them at some point. You might think that it is important to remember why I picked them and you would be right up to a point. The danger is that in addition to holding the share I also start to “own” my opinion. This is where confirmation bias kicks in and I start filtering the news in search of verification. I have to remember that I must check whether I still believe in the company and that belief is ultimately involuntary. In modern jargon, the company is an evolving entity and what I believe about it is not a settled fact but rather – here goes – a journey!


Here is my personal history with Dairy Crest, which makes dairy based consumer products like cheese, butter and non-dairy oil-based spreads. .

As I have written many times before, it is not beyond the ability of anyone to try to time market buys and sells, despite the endless propaganda from the professional investment community. I was naturally disturbed by the financial crisis in 2008 and, human nature being what it is, was more worried about buying too early than missing the bottom.

I started buying Dairy Crest at 346p in December 2009 and added some more in June 2010 at 357p. At the time it paid a dividend of c.19p a share giving a yield of more than 5%. Since then the dividend has not only been paid every year but has quietly risen to 22.7p. I have received 196p in aggregate dividends on the first shares I purchased so I have no obvious reason to be dissatisfied.

Trying now to remember why I bought the shares in the first place I come up with the following.

1) It had fallen a lot. It traded at 700p in July 2007.In December 2008 it traded at 190p. Wow.

2) Gilt yields were sliding (but were still 3.9%) and the relative attraction of a 5% dividend was growing.

3) It had an operating margin of c.6% and generated decent net cash flow.

4) I couldn’t see any obvious reason why its business should be disrupted by what I wrongly  imagined at the time would be the shaming and dismemberment of the banking industry. Even redundant bankers had to eat.

A couple of major strategic events followed in the next years. In 2012 the company sold its French spreads business, St Hubert, for €430m. This considerably reduced net debt and appeased the pension trustees who, unbeknown to me, had been complaining.

In 2015 the company sold its dairy i.e. milk business, which was volatile and generally struggling. Milk had become a commodity, often used as a loss-leader by supermarkets and Dairy Crest wanted to be known for its consumer brands.

In May last year there was a 10% capital increase with new shares sold at 495p raising £70m. This was to fund new cheese production at its plant in Davidstow Cornwall. It’s refreshing and quite unusual to see a capital raising aimed at investing in the business rather than mollifying the creditors.

Dairy Crest shares are now 480p. The dividend yield is 4.7%. I still believe the shares are worth buying. Here’s why:

1) The business now consists mostly of strong consumer brands including Cathedral City cheddar, Country Life butter, Clover spread and Vitalite, the most popular butter substitute among vegans.

2) Being exposed to milk production was a drag on the business and investor sentiment.  Milk is now just a raw material. If its price rises (as it has) it affects all dairy products.

3) The balance sheet is sound and the pension deficit has gone.

4) All the above make me think that in the long run Dairy Crest is a likely acquisition target for a multinational brand conglomerate.

In summary, my four reasons for liking Dairy Crest now are fairly different from the reasons in 2010. The company has moved on and my opinion has evolved with it. I try to feel no loyalty to the share itself which, after all, does not know that I own it.

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