What investors can learn from Sherlock Holmes

Back in the 1980s, Abbey National employed a woman named Nikki Caparn as a secretary. But her job at the building society had a peculiar quirk: unlike most secretaries, her sole task was to answer letters addressed to one man – and he didn’t exist.  

After Abbey National moved into Abbey House at 219-229 Baker Street, London, in the 1930s, it received so much mail addressed to 221b that it ended up employing a secretary on behalf of its most famous resident: Sherlock Holmes. Caparn was one of many people who held the role until Abbey National vacated the building in 2005, a year after it had been acquired by Santander. 

Today, our SmartGARP stock-selection tool points to Santander as one of the most attractive investment opportunities in Europe: it is cheap, raising its earnings, buying back shares and paying a dividend.  

Yet we believe there is another link that connects SmartGARP and Sherlock Holmes: to be found in the way we go about picking stocks and the way the world’s greatest detective went about solving crimes.

“The grand thing is to be able to reason backwards” 

In A Study in Scarlet, after Holmes has apprehended cab driver Jefferson Hope for murder, he surprises Dr Watson by referring to the case as “simple”. It is, he explains, a straightforward case of being able to “reason backwards”.

“Most people, if you describe a train of events to them, will tell you what the result would be,” he tells the doctor. “There are few people, however, who, if you told them a result, would be able to evolve from their own inner consciousness what the steps were which led up to that result.

Most investors look for the same end result – the highest total returns. Reasoning backwards, we ask, what drives total returns? Rising share prices and dividends. What makes these go up? If a share starts off undervalued and/or its earnings grow quickly. How do you identify such a share? SmartGARP was developed to screen for the eight factors that answer this question. 

Now, let us compare that with the process of other fund managers who reason forwards rather than backwards. Some will use the index as their starting point, then try to eke out a couple of extra basis points here and there. Others will look for the next big thing or make a point of meeting management teams.  

Will this lead them to pick shares that outperform? It’s certainly possible. But why would you start out reasoning forwards and investing in a way that you hope will allow you to beat the market, rather than reasoning backwards and focusing only on those factors that you know for a fact drive returns? 

“One begins to twist facts to suit theories, instead of theories to suit facts” 

In A Scandal in Bohemia, Holmes shows Watson a letter from someone describing his “recent services to one of the royal houses of Europe” and telling him they will call at his residence later that evening.  

“What do you imagine that it means?” Watson asks. 

“It is a capital mistake to theorise before one has data,” Holmes replies. “Insensibly, one begins to twist facts to suit theories, instead of theories to suit facts.”

We know which factors push share prices up and down and we know which factors indicate the direction these will move in. Therefore, all fund managers should discard any theories that contradict these facts.  

Instead, many do the opposite. Some fund managers will talk of their ‘belief’ in a company or management team, even after a series of profit warnings: in other words, they twist facts to suit theories, instead of theories to suit facts.  

Compare that with our approach. Earnings upgrades signal a company is growing faster than expected, so SmartGARP points us towards those in the habit of beating expectations. If they begin to disappoint, SmartGARP tells us to sell out and look for better opportunities elsewhere. 

“Emotional qualities are antagonistic to clear reasoning” 

In The Sign of Four, after bidding farewell to the woman who will eventually become his wife, a clearly smitten Watson remarks upon how attractive she is. 

“Is she? I did not observe,” Holmes languidly responds. 

“You really are an automaton – a calculating-machine!” Watson cries. “There is something positively inhuman in you at times.” 

He means it as an insult. Holmes simply smiles and tells him: “It is of the first importance not to allow your judgment to be biased by personal qualities. Emotional qualities are antagonistic to clear reasoning.” 

It is not just personal relationships that cloud our judgment. We all have unconscious biases or preconceived notions about the way things work, which we may think help us become better investors. They don’t.  

TUI is a good example of why. As a package holiday operator, it was supposed to have been disrupted by the internet as consumers cut out the middleman by booking their flights and hotels separately.  

Yet an article in the FT last year showed demand for package holidays had staged an unexpected comeback¹, driven by customers who wanted protection against “flight delays and cancellations, which are increasing in regularity due to strikes, wildfires and wars”.  

It all seems so obvious when they put it like that! But we’re not sure the idea would have flown (sorry) had we used it as the rationale for investing in the stock last May. Instead, SmartGARP highlighted TUI as a company that was cheaper yet growing faster than the market, so we bought it. It has performed well for us since then. 

The Artemis SmartGARP European Equity Fund has recently celebrated its 25th anniversary, following a strong calendar year of performance.  

Past performance is not a guide to the future. Source: Lipper Limited/Artemis for class I accumulation GBP to 31 December 2025. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. Classes may have charges or a hedging approach different from those in the IA sector benchmark.

Some of our clients have asked how we did it. In response, we would like to leave you with the words of the great detective himself. 

In The Adventure of the Crooked Man, Watson, narrating, describes his amazement that Holmes can judge how well his medical practice is doing from the cleanliness of his boots. 

“Excellent!” I cried. 

“Elementary,” said he.