Interviews with Intelligent Investors

Many of you know Miguel Barbosa as the author behind the Simolean Sense blog.  He is relentless in posting interesting links to reading material as well as videos, etc.  He is also the creator of the new website The Atlas of Public Stocks that is sort of a Google Maps for stocks around the world (very cool, definitely check it out).

He also publishes an interview letter called Interviews for Intelligent Investors.  He let us share an issue of this letter where he interviews our friends Wes Gray and Toby Carlisle.

A quick quote before the download ( I use this one since I’m going to Del Mar to watch the ponies this weekend):


Toby: An example would be a study that we discuss in the book, which looks at horserace handicapping. This study is relevant because like investors handicappers have to make predictions under uncertainty. The experiment goes as follows: Researchers asked them for 20 factors that would determine the outcome of a race. Researchers then broke these 20 factors into five groups of four and randomized them so each handicapper would get a different group of variables. Each handicapper was then given pieces of information to make a prediction about the outcome of a horse race and was required to make a prediction. They were subsequently provided with another group of factors and asked whether they wanted to change their prediction and then how confident they felt. What the researches found is that the accuracy (based on the predictions vs actual outcomes) didn’t improve when handicappers were provided with additional blocks of information but their confidence in the accuracy of their predictions did increase. The reason that this occurred is that we collect additional information we filter it on the basis of the information that we already understand. So, we create a story, and as we encounter new information we accept it or reject it based on whether it fits our initial story.

So two experts could be sitting next to each other with different perspectives generated from getting different pieces of (initial) information and they wouldn’t change their mind even if the next piece of information they got was the one that the guy sitting beside him had received.
Wes: What Toby is describing happened to me when I was a stock picker. I remember a stock I invested in called Combimatrix. I was like “Oh man, this is great,” I did my research, visited the company, met the CEO, etc. I uncovered everything you could ever want to know about the company. Well, I lost 95% of my investment and it was because of what Toby is describing. Every single time I collected more information I was more and more convinced that it was a great investment. Unfortunately, all my additional research was reinforcing my original hypothesis and making me more confident. As the stock dropped, I bought more–how could I lose? I think this phenomenon of more information translating into higher confidence but no corresponding increase in accuracy, represents a huge danger for bottom up investors. These investors often think they are

conducting “value-add” research when in fact they are just convincing themselves of the soundness of an ill formed idea.

Miguel: Yeah, my ex-boss used to say, “Within the first 30 minutes to an hour I know if it’s the type of thing I want to buy or not and then I’m just looking for details to disprove my thesis.” And he used to tell me all the time, “Be careful, because you can know too much.” This happened to me often. I would go into such detail, that I lost all sense of perspective. I couldn’t zoom out and weigh the factors that really mattered.


Download PDF here:

Gray & Carlisle Interview