Analyses and investment views

How investors´ minds work

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At the invitation of John Mihaljevic, I once again spent three beautiful days during June at the event known as The Zurich Project. Each year, investment managers from all across the world gather there to share their experiences in building investment businesses and with investing generally. The location is far from the daily hustle and bustle, atop Mount Uetliberg and with a view to Lake Zürich.

This year, there were nearly 60 of us, with representation from every continent with the exception of Antarctica. Over three days’ time, everybody gradually took turns in leading their seminars. The entire community is made up of value investors, so everyone has something in common and takes a similar view about investing. Despite their fundamental similarities, it is interesting to note that each one invests in different companies and it would be difficult to find two similar portfolios among those participating.

How, one might ask, can it be that the portfolios of these investors differ so much from one another when all of these people share a similar investment philosophy, stemming from the teachings of the same legendary investors, and even are studying the same companies? As we converse with one another, I can observe how the individual investors think about things, and I get the impression that each investor has a particular view as to what an ideal investment looks like. That view emanates from a mental model of how the world works and which has taken shape in that investor’s own mind.

From the debates among the various investors, it becomes evident that their models of how the world works oftentimes differ greatly from one another. They are in large measure subjective and are conditioned upon the knowledge and experiences that each individual investor has accumulated through his or her life. The investor then judges every potential investment on the basis of whether it fits into his or her mental formulation.

It seems to me that the most successful investors are those who are continuously testing and adjusting their mental models based upon feedback from new experiences and learning. I think the greatest risk arises in situations when an investor gets locked into his or her existing mental model and, whether consciously or unconsciously, seeks out information that simply reconfirms the perceived correctness of his or her thinking.

To the contrary, I have noticed that the best investors endeavour constantly to torpedo their internal models of thinking by studying opposing or conflicting opinions. A person more or less tests one’s own hypotheses by challenging them with opposing hypotheses. These people are aware that even though their investment results are excellent their mental formulation and manner of thinking might be erroneous (which is one of the great paradoxes of investing). Therefore, they are constantly looking for evidence that contradicts their mental models.

This activity is common to the majority of successful investors, and it needs to be consciously organized. It does not just flow on its own. One approach that I have found useful through recent years has been to make sure that a certain part of what I am reading is selected haphazardly.

I spend the majority of the day reading. In view of the fact that the amount which a person can read is not unlimited, I strive to carefully choose and organize what I will read. But this choice is influenced by what I enjoy and understand best. I have my favourite investors, favourite authors, favourite investment themes, as well as sectors that I understand better than others and a view about where to seek out good companies and investment opportunities. That all proceeds from my own mental model.

Following this approach in choosing what to study has one big advantage and one big disadvantage. The advantage is that if, for example, I will reflect into my selection of study material my personal experiences about where most probably to find good investments, then I will wholly avoid large areas with lower chances for discovering good investments, and thus my work will be more effective.

The disadvantage in pursuing this approach, on the other hand, is that it threatens to leave me stuck and shrinking away in my own mental model, even without being consciousness of it. One needs to find a happy medium between the two arguments. There are various potential solutions to this conflict. What has proven useful to me, for example, is to endeavour that a certain percent of what I read will be chosen at random – and particularly as it concerns studying individual companies, sectors, and analyses. We have created a certain mechanism for our fund that has proven itself to us. Majority of the random reading admittedly does not lead to new investments, but it does help us to develop and adapt our mental models. One of the most beautiful things about investing is that a person can constantly move ahead, learn, and achieve joy from intellectual activity.

Invest with care!

Daniel Gladiš, 19 July 2018


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