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This is written with serious investors in mind. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, March 1, 2016

A brief observation about "above average" investors

This might go in the "obvious" department but I've recently realized that all investors who are bullish on a stock can find answers everywhere that support their bullishness. I think this dynamic is true from the greatest investor to the worst, and there's something eminently uncomfortable to me about it.

For example, if you ask any investor about their best idea and you're lucky enough to get an honest and sincere answer, then maybe they'll tell you they like XYZ Corp, and why.

And if they're done their homework, then when you ask about the competition, or the input costs, or customer spending trends, or management, or rising receivables, or any of the numerous factors that impacts an investment decisions, they're likely to give you answers that explains away the criticism and reinforces their enthusiasm.

Regardless of outcome, it seems to me that there's a huge problem with this dynamic. How can EVERYONE have this same experience??? We're not ALL above average!!!

I recently asked a friend that manages a $500M pod at a "market neutral fund" for help about this - and although our investment universe and horizons differ materially - he affirmed the notion that bullish investors are ... well, bullish. "When you're long a stock you SHOULD feel good about it. You LIKE the information." But he didn't quite see the issue that I was talking about.

And so I asked him how he - a PM - seeks out information that might disrupt his bullish view and he asked why he would do this. That was a surprising response.

I always look for people who disagree with me. I once had a client at a well known short-selling hedge fund who told me, "when I talk to the rest of the sell side, the minute I disagree with them the conversation stops. But with you, it starts a whole new conversation."

There are few things I appreciate more in life than learning something that changes a perspective for me 180 degrees. As we get older, those moments get rarer, and sometimes they're disappointing, but we need to test our assumptions.

The same needs to be true for investing so that we're not deluded by our own bullishness.

Here are some questions I ask myself when I feel like I'm overly bullish: If I retraced the steps that got me here, would I end up with the same conclusion I had when I first arrived? what would convince me now that I'm wrong? and always the tried and true; what don't I know?

With FTLF, currently one of my favorite ideas, I have not found any new negative information beyond the initial hurdles over the industry that shakes my judgment. As I talk with colleagues who ask questions and raise doubts, it makes me feel more confident about my investment, because I want to be investing in an area that everyone else hates; that's what makes it inexpensive. But even as I seek evidence to disprove my thesis, I just haven't find anything new

"If you know the future, it's silly to play defense. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary, and maximum leverage can be employed. In fact, being unduly modest about what you know can result in opportunity costs." Howard Marks, The Most Important Thing

As I think about it, delusion is not often talked about in the investing world but it's a major part of the industry, marketed I think as "opportunity". But the path to avoiding delusion is to always seek incremental information for evidence that disproves your thesis, so as not to be fooled by confirmation biases. That, along with putting the most capital behind the best ideas and having the judgment to be right, is the hallmark of a truly great investor.

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