The Garrulous Jay – End Of The Line

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This week saw the end of the on-going speculation about the HS2 rail project as Rishi Sunak called time on the Birmingham to Manchester section of the line. Are there any lessons to be learnt by investors from this whole sorry saga?

To appropriate Simon Sinek’s famous line, it started with a ‘Y’, and has ended up an ‘I’. Whether you believe sanity finally overcame vanity or you regard this as another example of Westminster MPs abandoning the North, it has been clear for some time that something was going wrong with HS2.

Conceived in the smouldering embers of the Labour government in 2009, and subsequently adopted by the Cameron-Clegg coalition the following year, the purpose of the new line was as much to free up capacity on existing railway infrastructure as it was to get people up and down the country more quickly.

After all, in the age of Wi-Fi and with the appropriate carriage configuration, the idea that time spent travelling was time wasted was always questionable. And in the post-Covid era of Teams & Zoom the argument for people needing to travel to meetings at all was further weakened.

But the real killer was the cost… Originally estimated at £31-36 billion, by this year the budget had ballooned to over £100 billion, with some estimates as high as £170 billion.

The scale of infrastructure projects of this nature is so great that it requires public sector backing to conceive and implement them. But the inherent tension here is that with that comes political involvement, which in turn can lead to poor decision-making and a determination to carry on regardless of the mounting evidence that alternatives should be considered.

Herein lie the similarities with the perils of investing.

In the same way as politicians can literally become too invested in a big project, the owner of a particular stock may fall prey to confirmation bias, subconsciously seeking justification to continue to hold it even as sentiment turns and the price falls.

For big capital projects those invested can also fall prey to the so-called ‘sunk cost fallacy’, where so much has already been spent on an undertaking it becomes profoundly unpalatable to abandon it. For investors this can be reframed as loss aversion, whereby they become reluctant to sell a falling stock because of the financial pain this will crystallise.

The combination of loss aversion, or sunk cost fallacy, and confirmation bias can be highly toxic for politicians and investors – particularly professional fund managers – alike.

For fund managers this is especially challenging as they often make serious money by backing their conviction that the market’s wrong about, and therefore undervalues, the companies they own. Nevertheless, I always worry when a fund manager repeatedly argues that “the market’s got this wrong”. Ultimately the market is always right.

Whether Sunak’s decision is right or wrong is a matter of opinion. That he chose the harder option is less debateable.