What happens if a company in which you have an investment makes odd decisions? Selling the shares might not always be the best course of action if the company eventually proves its decisions were wise.

As an investor you will need to decide whether to put your trust in the directors or not. Selling now or waiting to see if the decisions were the correct ones will mean you either avoid incurring a loss (if the decisions were bad) or you risk giving up gains if the decisions were good.

It’s a subject raised by fund manager Nick Train in his latest commentary for CF Lindsell Train UK Equity Fund (GB00B18B9X76) and something which more investors should consider.

Odd decisions in practice

Examples of peculiar decisions might be an acquisition unrelated to a company’s core business. Or it might be accelerating expansion at a time when market conditions are unstable.

Fortunately investors can have a powerful voice and influence corporate decisions. After all, a shareholder is someone who is part owner of the business.

Using his power as a fund manager, Nick Train says he has raised questions with the board of Diageo (DGE) about how the drinks group is executing its strategy.

He recalls Diageo’s decision to increase exposure to emerging economies between 2011 and 2013 – in what turned out to be the top of the market.

Both the chief executive and chief financial officer have changed since the deals were done, and Train believes some of the businesses are still worth owning, despite having struggled in recent years. Yet it seems Diageo may not have learned from its mistakes.

What looks odd?

Diageo recently announced a £1.5bn share buyback when its shares traded at an all-time high. Wouldn’t this have been better two years ago when the shares traded one third lower?

And two months ago Diageo said it would spend up to $1bn on a four-year old tequila business called Casamigos – a high price and an odd move given it had bought another tequila firm only two years ago called Don Julio.

‘What’s more, part of the consideration to pay for Don Julio was the sale/swap of Diageo’s then Irish Whiskey brand, Bushmills – the world’s oldest distillery,’ says Train.

‘We were sorry to see Bushmills go and then somewhat surprised to see Diageo announce this year it is investing in the creation of a brand new Irish whiskey brand. It’ll take some doing to match the 409 year heritage of Bushmills. And, ostensibly, it does not appear consistent.’

Train likes the company’s brand portfolio and global distribution, as well as its ability to generate good margins and decent levels of cash.

But surely those merits are at risk if Diageo is misallocating its cash? Hopefully shareholder power will ensure such odd decisions are a rarity.

‘We are watching very closely the capital allocation decisions taken by the boards of the companies we hold – knowing that cumulatively and over time it is the calibre of those decisions that will determine the long term success, or otherwise, of our own investment decisions, made with your capital,’ concludes Train. Those are wise words – and ones which you should follow with your own investments.

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