Ideas Farm: Ruffer's reward for failure

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  • Try holding these two statements in your head without getting giddy
  • Ruffer made a really bad bet on bitcoin
  • Ruffer more than doubled its money on bitcoin
  • Loads of new idea generating data

What’s the definition of a bad investment? For many of us, a strong contender would be an investment that utterly fails to deliver on its objectives. However, it’s hard to square the notion of an investment gone bad with a $1.1bn profit and near-150 per cent gain in under six months. Yet that seems to be what has happened with a foray into bitcoin by wealth preservation specialist Ruffer Investment Company (RICA).

The investment firm describes the rationale for its original interest in the crypto-currency as “a defensive investment, to add diversification to our inflation hedges”. 

This already looked rather questionable last November when it spent £550m on coins and proxy exposure through shares in US companies Microstrategy and Galaxy Digital. The price of bitcoin at $17,000 had roared ahead by about 40 per cent in the three months to mid November and 80 per cent in the preceding year. Few would associate such price action with a “defensive investment” – even if the bitcoin price dances to a different tune than other assets. 

Another argument put forward by the manager at the time – that bitcoin may be in the “foothills of a long trend of institutional adoption” that could produce massive gains – seems more persuasive. Although this tack feels more speculative than defensive.

Whatever the case, Ruffer got it wrong and bailed on the investment. It just so happens the wake-up call the manager received came as a result of a massive surge in the price of bitcoin propelled by Elon Musk’s tweets. Contrition proved very profitable. Ruffer offloaded the last of its bitcoin exposure in April before the value of the cryptocurrency abruptly halved from its highs of over $60,000. 

Such incongruous events – a wrong call resulting in a massive profit – give a visceral illustration of how hard it is for investors to receive reliable feedback on their endeavours. With a vast profit banked, who wouldn’t be urged to bask in the success of being so wrong. Such a heady return over such a short period will surely mean Ruffer will have reaped a far greater reward from a failure than from many of the investments it has been right about. 

Psychologically, such juxtaposed ideas – being wrong and profiting hugely from it – are almost impossible to reconcile. Our thoughts are curdled by the contradiction. The lack of justice is infuriating. It’s the type of thing that makes a thoughtful investor want to throw in the towel and put everything into Dog Money (what the cool kids call crypto currency dogecoin).

However, Ruffer is a thoughtful investment firm as well as one that’s happy to back unconventional assets. It was level-headed enough to keep bitcoin exposure reasonable (2.5 per cent of assets were originally invested). And when it understood its bitcoin investment was not delivering the type of returns it wanted, it made a thoughtful response and got out. 

Normally, the money made by investors that respond well to having made a bad call comes from cutting losses before things get worse. For Ruffer, as luck would have it, it involved taking an enormous profit. But if Ruffer had not taken such a thoughtful approach, a substantial proportion of those profits would have now evaporated.

Perhaps the moral of this confusing story is that while all investors get things wrong, it’s how failure is dealt with that counts.