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Always maintain a little perspective

Jul 18 2019 12:44
Simon Brown

One of the most important, and hardest, things to do as an investor is to actively seek out views that are different from your own.

That includes our big-picture views, as well as our specific views on individual stocks.

It’s hard to challenge our own views, because we become emotionally invested in our positions.

But the problem with that is that we then ignore any opposing view, dismissing it as wrong.

It’s a strong cognitive bias; confirmation bias, whereby we tend to look for data that confirms our view and we reject opposing views.

 A recent example for me was Tongaat Hulett, which I owned way back when it was around R110 a share. My thesis was that the returning rains would boost sugar production.

At the end of the day, I sold about a year later at exactly the same price I bought at. But while I was holding, pretty much everybody I spoke to or saw commenting on the stock was in agreement with me.

Yet the price was not playing ball and moving higher.

 There was, however, one person was short the stock and I asked them why. Their thesis was that sugar prices were under pressure globally, because in Europe there was a trend to start using beets for sugar.

At the same time, they had deep concerns about debt and land sales. Well we now know who was right here.

At the time it got me thinking more about my position and doing a lot more digging, especially into land sales and European beet production.

Eventually, a set of modest results from Tongaat saw me sell, thereby admitting my thesis was not working.

 I take it a step further and actively follow people on Twitter who I think are half crazy, and who I hardly agree with, but it keeps me open to opposing ideas.

I have set up lists on Twitter or Google alerts. Mostly I use Twitter, but I also keep tabs on a few individuals or stocks via Google alerts as not everybody is on Twitter.

I also read analysts’ reports and news articles that have opposing views.

 Importantly, no idea that is opposite to mine will see me rushing to hit the sell button. But I do keep adding to my thesis and taking in these opposing views.

A few years ago, I went as far as to add a new section to my methodology which is titled “the other side”; I now want to know what the opposing views are and keep track of them.

What is also important is the quality of the opposing views.

If you spend five minutes on Twitter, you’ll find thousands of end-of-world views both for the local and the global economy.

These people (who have forever been warning about the end of everything) will tell you to only buy gold or crypto.

But I am not looking for broken records. What I want is people who do change their minds, publicly.

You have to be selective in building this list of alternative views and you have to check them out by digging into their past views, searching not only for accuracy but also that important attribute of being able to concede when they’re wrong.

Then, as I said upfront, I keep tabs on these views, but somebody contradicting what I think doesn’t automatically trigger me to change my mind. What it’s doing is giving me a warning sign that I can monitor.

And even when I am right, I don’t dismiss their views as worthless. Any smartly argued opposing view is valuable, even if at the end of the day it doesn’t hold up.

This article originally appeared in the 25 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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