How Great Investors Avoid Falling in Love With Their Stocks

During their recent episode, Taylor, Carlisle, and Matt Sweeney discussed How Great Investors Avoid Falling in Love With Their Stocks. Here’s an excerpt from the episode:

[Matt] Yeah, so I know what I do. Basically, a group of managers got together, I don’t know, it’s seven or eight years ago now. Something that Scott Miller of Greenhaven Road put together where we did kind of a workshop with Annie Duke, and talk about decision making.

For those that don’t know, Annie Duke, I know you guys know, but she’s the world’s winningest professional female poker player. She was a PhD in psychology, and she dropped out of the programme to pursue her poker career, but has since become, I guess, an expert in decision making. So we did a workshop with Annie Duke, and it was, I don’t know, 10 or 12 managers sponsored by Scott Miller.

And we kind of came together and talked about the problem we all run into as solo practitioners is that, I’m trying to, I’m trying to phrase it politely for the audience here, but basically, you can wind up believing your own, your own bull, if you will. And that’s one of the most dangerous things, right, is you’re, you’re very, it’s very easy to trick yourself. So you need a mechanism to avoid that.

Now the problem, if you’re at a, you know, whether it’s a platform with an institutional decision-making framework, or whether it’s a, you know, a solo practitioner with an analyst, or whatever it might be, there are certain pressures that apply to the person who is supposed to be there to challenge you. So, you know, for example, with me, one of the things I think about, if I had an analyst, on some level, the analyst would think that his bonus is going to be tied to his ability to get names in the book. And I always think of my job as like, I don’t want anything in the book.

Like I want it to be, I want the bar to be very high. So I want to say no, and your job is to make me say yes. That’s one conflict.

But then the other conflict is maybe you want to say yes to anything, just because you want to please me. If I like something, maybe you want to like it to please me. So there’s no number of conflicts there.

And there are ways to get around them. But going back to this workshop, what we did was basically acknowledge that if someone, if you share your work with someone, they tell you that it’s bad, there or that they disagree, there is a social cost to that. So people are unlikely to impose that social cost on themselves.

And they might be hesitant to disagree with you or challenge you. But if as a group up front, you acknowledge that social cost, and then say, we’re just not going to charge it to each other. You know, that sort of eliminates the risk, to some extent.

So for me, in part of my process, typically, when I’m, I don’t know, 80 or 85% done with my work on a name, I will go to someone that I’ve sort of have this arrangement with, I call it the red team, as do other people in this group and say, Hey, this is this is where I am. This is why I like it. But I don’t know what I’m missing.

And I don’t know where I need to focus more time and what blind spots I have, can you look at it. And I don’t want you to come back and tell me how smart I am and how much money I’m going to make. I want you to come back, even if you love it, come back and just tell me what you don’t like and criticise me as much as you can to help me be aware of my own blind spots and be aware of how I might be fooling myself.

And that I have found that that works very well, because you have someone who I, you know, for me, using the, the idea of like, why I prefer this rather than an in house analyst, a lot of times is members of the group, they have a lot of skin in their own game, so they don’t, but they don’t have any skin in my game. So they don’t really care, you know, whether it works, whether the idea works or does not work, although they may choose to invest on it and their own later, but they get away from that problem that an in house analyst might have of where he’s trying to get things in the book. And then often, an analyst, there are of course exceptions, but most typically an analyst that would work at a fund like Laughing Water Capital is someone who is, I don’t know, 25, 27 years old, whatever it might be, I’m sure they go to a top school and, you know, banking at Goldman Sachs or whatever it might be, but very limited real world experience actually running a portfolio, especially on the, you know, the non quantitative side, the emotional side of like, what is it like, what does it feel like to hold concentrated positions when the market is telling you every day you’re wrong, that sort of thing. Like that’s that skill set, that experience set is very hard to come by unless you’re actually running a portfolio yourself. Whereas the guys that I would work with in these situations, like they’ve been doing it, they’ve been fighting those battles themselves for, you know, 10, 15, 20 years or whatever.

So they understand the pressure that comes with that in a way that an analyst by themselves maybe would not. So it’s kind of, you know, building this structure to prevent me from fooling myself because, you know, everybody tends to fall in love with their own ideas. It’s just part of the human condition and that could be dangerous.