The Abominable No Man

by Jamie Hyndman, Mawer Investment Management

I wonder how many investment ideas start optimistically, perhaps with a phrase like, “wow, this stock looks very exciting.” I’m guessing most. However, analyzing a prospective investment with a positive bias is dangerous. This is because of a behavioural finance error known as confirmation bias, which is the tendency to seek out and favour information that confirms one’s initial beliefs.

As a risk conscious investment manager, we (like the “Abominable No Man” himself, Charlie Munger) try very hard not to think of a potential new investment this way. In fact, we take quite a different tack and believe the best approach includes actively looking for holes in a given investment thesis to try and disprove it. This thought process helps identify risks that may have been overlooked or understated.

So how do we do this? One way is to search for sources of information that have a negative view on a given company. This could be from a sell-side analyst for example, or a competitor of the company that we’re examining. We may also seek out completely independent sources of information from areas such as an industry trade union or a governing body. We often go as far as to assign someone from our research team to play devil’s advocate and try to discredit a potential investment.

The benefit of this approach is that it results in a cautious, almost skeptical manner of investing where the “Abominable No Man” can be found at every turn, ready to pounce on a weak investment idea at any time.

Jamie Hyndman