Amen of the Week:
"While I classify myself as a contrarian by nature, I always make sure I have plenty of conventional, hard analytical thinking around to tell me why my latest brainstorm makes no sense and won't work."
-Richard Jenrette, co-founder of DLJ
(from the Contrarian Manager)
I’m wrong ... a lot.
I bet you’re not used to hearing someone admit that. That’s too bad because the truth is that all of us are wrong a lot – especially when it comes to investing.
Last spring I gave a lecture on “My Biggest Mistake” to the Advanced Investment Research class at Columbia Business School. I described how in the mid-2000’s I was seduced into believing Borders Books was an under-valued, attractive investment. With the benefit of hindsight, I share lessons learned. One of those lessons is to incorporate the use of Analysis of Competing Hypotheses (ACH), a research method developed by the CIA in the 1970s. You can see the video of my presentation here.
For those of you in “truth seeking” professions, you can learn more about ACH in a video of a separate lecture I gave earlier this year up at Columbia (“The Truth Map”).
A good friend once told me how incredibly nice he found hedge fund analysts to be. He had joined a hedge fund to head up their legal research efforts, leaving behind his role as a partner with a top global law firm. He gushed at how much nicer he found his new colleagues were. My response was, “That’s because they’re wrong all the time.” The best analysts at the best firms are constantly reminded how fallible their judgement is, so they cannot help but develop a little humility. Unfortunately, most people, especially in high-powered positions, are insulated from this reality check.
Being wrong a lot is something we should all embrace. That extends to all parts of our lives. We’re wrong far more than we want to acknowledge – to ourselves, and certainly to others. This applies to our judgments on other people, on politics, on everything. My deeply rooted libertarian views, I believe, are well-reasoned, yet I have good friends with polar opposite philosophies. Some of these people are much smarter and far more successful than me. How can this help but keep me on my toes, constantly rethinking and reconsidering my views. That’s one of the benefits of living in New York. It keeps me from succumbing to the illusion that all who disagree with me must be morons.
If we accept being wrong as a frequent inevitability, the best solution is to learn how to recognize it and change course quickly. We did this with Borders, and that mistake was thankfully more than overshadowed by successes in other investments that year. Being quick to spot and then own up to mistakes, however, requires being in the right environment – one that accepts error. Exploration, discovery, and enlightenment happen no other way. Based on my experience, that type of culture not only produces better results but a more personally fulfilling and sustainable organization.
Yours in the Field,
Frank Byrd, CFA
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