Actions Speak Much Louder Than Words

As I’ve prob­a­bly men­tioned, dur­ing the last week I’ve been lis­ten­ing to Shostakovich’s Sev­enth Sym­pho­ny, aka the Leningrad, over and over. I’ve also been watch­ing a 2016 BBC doc­u­men­tary about the Leningrad pre­mière. It’s been called “a leg­endary moment in Sovi­et polit­i­cal and mil­i­tary his­to­ry” and for good rea­son.

Two ques­tions I’ve been think­ing about are: why the hell would you try to put on a con­cert when peo­ple are dying of star­va­tion and a city is under siege? And… what invest­ing par­al­lels can I learn from this sto­ry?

Sure­ly “art” could take a back seat dur­ing the most bru­tal siege in his­to­ry. I’d put “find­ing food” and “sur­vive the bru­tal win­ter” much high­er on my list of impor­tant things. But it served two impor­tant pur­pos­es. I’ll get to that in a minute. Let me give some con­text.

If you don’t know any­thing about the sym­pho­ny, here’s the quick ver­sion. In 1941, Ger­many invad­ed the Sovi­et Union dur­ing the open­ing stages of Oper­a­tion Bar­barossa and laid siege to Leningrad, now Saint Peters­burg and block­ad­ed the city. It last­ed 872 days, and an esti­mat­ed 1.5 mil­lion peo­ple died out of a pop­u­la­tion of about three mil­lion, many of them from star­va­tion.

Leningrad was Shostakovich’s home town. He and his fam­i­ly were there dur­ing the ear­ly months of the siege, and he start­ed com­pos­ing the Sev­enth Sym­pho­ny while the city was under attack. He was even­tu­al­ly evac­u­at­ed and fin­ished it else­where in the Sovi­et Union.

In August 1942, the sym­pho­ny was per­formed in Leningrad for the first time. It’s a crazy sto­ry. Karl Elias­berg, the only con­duc­tor left in the city, sum­moned the play­ers of his Leningrad Radio Orches­tra, only fif­teen out of the usu­al forty mem­bers were still avail­able; the oth­ers had either starved to death or left to fight the ene­my. Elias­berg him­self had spent the last few months in hos­pi­tal recov­er­ing from extreme exhaus­tion and dys­tro­phy caused by mal­nour­ish­ment.

Now, this sym­pho­ny is mas­sive. It’s designed to be incred­i­bly loud and ter­ri­fy­ing, and it needs a huge orches­tra of 100 play­ers to per­form it prop­er­ly. So Elias­berg had to find more musi­cians, lit­er­al­ly going door to door to find as many as he could, only to dis­cov­er many of them suf­fer­ing from mal­nu­tri­tion. Some were too weak even to rehearse. Oth­ers faint­ed dur­ing rehearsals. He used them any­way.

Why both­er under these cir­cum­stances?

The per­for­mance was pert­ly intend­ed to bol­ster the morale of the peo­ple in Leningrad. As one of the sur­viv­ing audi­ence mem­bers told the doc­u­men­tary in 2016: “There was a sense of pride. Damn you! We have an orches­tra, and we’re at the Phil­har­mon­ic Hall! We were sur­round­ed by Ger­mans, they were shelling us, but there was this feel­ing of supe­ri­or­i­ty.”

And it was also used as psy­cho­log­i­cal war­fare against the Ger­man forces sur­round­ing the city. Radio Leningrad set up speak­ers to broad­cast the per­for­mance to the Ger­man front. “We’re still alive and you haven’t crushed our spir­it.” (The mes­sage was NOT, as TK sug­gest­ed on the show this week, “end the siege now, or we’ll play his first six sym­phonies as well!” Geeeez.….)

After the war, Ger­man PoWs sup­pos­ed­ly told the Sovi­ets that after hear­ing the per­for­mance many of them had the feel­ing that they were going to lose the war.

The per­for­mance was what you might call “cost­ly sig­nalling”, as opposed to “cheap sig­nalling”. Cheap sig­nalling does­n’t cost you much in time or effort. You just say, “things are going great” and move on.

Actu­al­ly pulling togeth­er an orches­tra when the city is starv­ing, and then putting on a con­cert? Peo­ple who can bare­ly walk putting on their finest clothes and turn­ing up to hear it? That costs some­thing. They were say­ing: we’re still here. We can still pro­duce and per­form great art.

But, I hear you say­ing — okay nerd, what does this have to do with invest­ing?

I’ve been think­ing a bit this week about cost­ly sig­nalling in val­ue invest­ing. We’ve often heard Tony say over the years that he ignores the sto­ries and looks at the num­bers. Of course, the num­bers tell a sto­ry, too. It’s just a more believ­able sto­ry than the one the CEO will usu­al­ly trot out. One of the things we’re look­ing for is whether a com­pa­ny backs up what it says with some­thing that costs it real mon­ey or real effort.

Say­ing that every­thing is great, busi­ness is boom­ing and there are good times ahead is the job of every CEO. But where the rub­ber meets the road is in the num­bers. A cost­ly sig­nal is per­sua­sive when it’s hard­er for some­one who can­not back up the claim to imi­tate.

It’s one of the rea­sons we look at the direc­tors’ equi­ty stakes in a busi­ness. They might talk a good talk, but how much of their own mon­ey have they put into the com­pa­ny’s stock? If you think the com­pa­ny’s future is rosy, sink your own damn cash into the shares. Or take a huge chunk of your com­pen­sa­tion as shares.

We also look at how the com­pa­ny spends its own prof­its.

For exam­ple — share buy­backs, some­thing we added to the check­list rel­a­tive­ly recent­ly. If a com­pa­ny is spend­ing its hard-earned cash to buy­back its own stock, it thinks that’s a bet­ter use of its funds than, say, div­i­dends, mar­ket­ing, dis­count pro­mo­tions, new offices, acqui­si­tions, or new equip­ment. Instead, it’s buy­ing its own shares. That’s a kind of cost­ly sig­nal about what it believes the busi­ness is worth. Any­one can just say “we’re doing a buy­back”. And many do. That’s why we don’t score a buy­back unless the share count has sig­nif­i­cant­ly dimin­ished.

Anoth­er kind of cost­ly sig­nalling is pay­ing down debt. We don’t score busi­ness­es for debt specif­i­cal­ly, but we do look at mea­sures such as finan­cial health and increas­ing equi­ty over time. Both relate, in some way, to how much debt the busi­ness is car­ry­ing.

Then there’s the div­i­dend. A busi­ness that keeps pay­ing one dur­ing tough times is spend­ing cash it could have used for oth­er things. That can be a sig­nal that it expects bet­ter times ahead.

Cost­ly sig­nalling is how com­pa­nies show us through their actions that they do actu­al­ly think their stock is worth buy­ing. They aren’t just say­ing they are doing well. They are putting on a show. Of course, a buy­back isn’t remote­ly the same as putting on a con­cert while dying of mal­nu­tri­tion. But you get my point. As the old say­ing goes — “actions speak much loud­er than words”.

Side­note: My kung fu abs are also a cost­ly sig­nal. Remind me to show them to Tony on the pod­cast next week. I think he needs moti­va­tion.

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