Never Commit

In Amazon’s 2016 letter to shareholders, Bezzos introduced some tenets the company lives by. The one that struck me was “Disagree & Commit”:

Third, use the phrase “disagree and commit.” This phrase will save a lot of time. If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?” By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes. – Jeff Bezzos

The principle seems to work great in the company – and I am certain they’re not the only one to execute this – and seems to fit the “real economy” execution challenge. As Taleb have put it in many different ways and forums, modularity and trial & error modus operandi leads to innovation without compromising the status quo. 

Well, I believe the “Disagree & Commit” modus operandi serves investors well, but via negativa. What I mean by that is: investors must disagree with the price of a stock when they either buy or sell it through story-telling, i.e., creating an investment hypothesis that should yield a different price for that security.

But what about committing? I’d like to share two angles:

  1. Derivative 1: Commit: when you actually buy / sell the security;
  2. Derivative 2: NEVER Commit. And that’s what I’d like to talk about.

My underlying assumption is that you should never really commit to an investment hypothesis because:

  • by design, each security price tells a different version of the future story;
  • different pieces of evidence can fit more than one hypothesis. Looking for satisficing hypothesis (MVP) is too narrow, leaving aside many plausible versions (open flanks) of the story in question (imagination & creativity are required);
    • What has real value is finding pieces of evidence that falsifies linchpin premises, not the other way around;
  • as working hypotheses might change along the way, you should never marry them;

We can intervene through greater understanding of what we can and cannot control, by knowing where potential deceptions lurk, and by a willingness to accept that our knowledge of the world around us is limited by fundamental conflicts in how our minds work. Certainty is not biologically possible. – Robert Burton

This is a risk-based approach to investment philosophy. It corroborates Buffett’s #1 rule of managing money, which is “Never lose money.” It corroborates other investors looking for similarities among different investment philosophies that found the one thing successful investors have in common is the ability to manage risk. It corroborates the need to allocate scarce resources well, in this case, our agendas. Without a strong defense, scoring is just dissipated energy. 

The skeptical have a biological/behavioral advantage in managing money. But I have gathered some “Never-Commit” tricks:

  • causality is generally hard to be delineated in complex problems. Instead, emphasize procedures that expose and elaborate alternative points of view;
  • design a process that clearly delineates their assumptions and chains of inference and that specify the degree and source of uncertainty involved;
  • periodically re-examine companies from the ground-up, maybe getting another person to look into it;
  • analytical conclusions should always be regarded as tentative. The situation may change, or it may remain unchanged while you receive new information that alters your initial appraisal;

In other words, commit without committing. My holding period is forever; until my appraisal changes.

Doubt is not a pleasant state, but certainty is a ridiculous one. – Voltaire

¹ The certainty epidemic

² Amazon 2016 Letter to Shareholders

 

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Deep Research versus Deep Pondering

Put bluntly, facts don’t exist. Versions of them do: what is a fact for me, is a picture of a worldy experience that commonly more than one person enjoys. That means that the interpretation of experiences yields different pseudo-facts depending on the points of view.

Even if we could agree on facts¹, different versions of facts exist for each individual. And that’s a big reason many of us like to simplify this disparate view into numbers/financial statements, albeit losing perspective and nuance – still we strive to acknowledge it.

Which begs the question: what is the real competitive advantage in investing? Deep research or deep pondering?

The vast majority of research pieces has the same underlying data and sources, so what would differ among them? Is it a matter of BRUTE FORCE & EFFORT? I’d say deep research is simply a pre-requisite for playing the real game. But what we call “edge” or “variant view” arguably lies within FRAMING, PONDERING, and how you INTERWINE separate pseudo-facts.

The market is a weighing machine (many claim it’s efficient, sovereign and omniscient), but so should we be weighing machines. In the world of big data, robots may arbitrage headlines, but they can’t (at least yet) ponder multiple subjective arguments like we can do. Counterintuitively, stretching investment horizons simplifies our job is in spite of additional possible outcomes. At least we are an order of magnitude right instead of precisely wrong.

 

 

¹ Taxonomy and vocabulary certainly are topics to be explored in a future post

What Does Sense-making Can Teach Investors?

Sense-making is a qualitative, multi-disciplinary approach to make something sensible, i.e., how we structure the unknown as so to be able to act in it. In other words, it consists in constructing, filtering, framing, creating facticity and rendering the subjective into something more tangible. According to Karl Weick,

sense-making is about plausibility, pragmatism, coherence, reasonableness, creation, invention and instrumentality.

In this synthesis exercise in which accuracy is secondary, I found a couple parallels and antithesis to equity research, investing and managing an asset management firm.
On equity research and investing:
  • Sense-making is a synthesis exercise which usually benefits from mental models utilization to simplify complex and open-ended problems – it does not rely on extensive analysis and accuracy as enactment is needed in the learning process. This one is partially correct for investing in my point of view, since extensive analysis is a pre-requisite before synthetizing what the analyst has learned. A complete due diligence is required to mitigate risks, although it will never be complete due to the ever changing landscape and eternal unknown unknowns;
  • As I’ve just watched the True Detective TV series, I’ve learned from detectives this time (instead of Munger) that reading and studying different topics from a variety of sources helps us arm our brains with bits & bytes which can be combined later on our professional and personal lives. Although, we need previous knowledge and context to successfully use them “to consolidate bits and pieces into a compact, sensible pattern frequently requires that one look beyond those bits and pieces to understand what they might mean. Often, it is necessary to move outside a system in order to see the patterns within. (…) Of course, there is always more than one metaphor that can capture a situation, which means that any given metaphor is likely to be contested.”
  • And when we are unprepared, the man-with-a-hammer syndrome unleashes:  “operators who have specialized expertise do not see the big picture as crises develop and therefore miss key events.” We will try to frame the problem within our pre-existing models, unfortunately;
  • We are more likely to uncover unanticipated and potentially valuable viewpoints and information armed with open-ended questions. Moreover, in this way we avoid confirmation bias;
  • Marcel Proust helped me out in this one: “The real voyage of discovery consists not in seeking new landscapes but in having new eyes.” Again, it’s all about having perspective;
  • Sense-making benefits from past data (quant, social, etc.) in a given context to extrapolate necessary actions – just like investors learning from post mortem analysis/financial markets history to be better prepared for decision making;
  • Consequences are difficult to forecast in advance, though scenario planning could help out with this one;
  • Sense-making opposes scenario planning as “explanations that are developed retrospectively to justify committed actions are often stronger than beliefs developed under other, less involving, conditions.” This one is screaming for me since I live in Brazil and we are used to see growth embedded in 99% of potential investments here, thus we aren’t THAT creative imagining different scenarios. Unfortunately, we usually classify then as improbable as a preconception;
  • Learn not only what financial statements represent, but what is behind it: “e very sensitive to operations. Learn from those closest to the front line, to customer, and to new technologies.
On risk:
  • “Human errors are fundamentally caused by human variability, which cannon be designed anyway – so our function is to be risk mitigators which must be embedded in the capital allocator job description;
  • Compounding mistakes: “Small events are carried forward, cumulate with other events, and over time systematically construct an environment that is a rare combination of unexpected simultaneous failures.”
  • Constant learning, perspective and team complementarity as a knowledge growth vector and risk mitigator: “Capacity and response repertoire affect crisis perception, because people see those events they feel they have the capacity to do something about. As capacities change, so too do perceptions and actions. This relationship is one of the crucial leverage points to improve crisis management.” As investors, we should only act or react when we are prepared and comfortable with what we know and what we don’t know;
On governance:

  • “The dark side of commitment is that it produces blind spots” – This one I’ve learned from Malcolm Gladwell article in The New Yorker Magazine: do not engage in negotiation with fanatics, nor trust entrepreneurs living their dreams in listed companies. In other words, do not them live their dreams with your money;
  • “Turnover is as much a threat to capacity as is understaffing, but for a different reason. Institutional memory is an important component of crisis management”
  • “Perception, however, is never free of preconceptions, and when people perceive without institutional memories, they are likely to be influenced by salient distractions or by experience gained in settings that are irrelevant to present problems.”
  •  “In a globally competitive environment our reward structures are geared toward rewarding immediate action and hence we may be signaling that sense-making is not a valued activity.”
  • “Sense-making is inherently collective; it is not nearly as effective to be the lone leader at the top doing all the sense-making by yourself. It is far better to compare your views with those of others – blending, negotiating, and integrating, until some mutually acceptable version is achieved. Soliciting and valuing divergent views and analytic perspectives, and staying open to a wide variety of inputs, results in a greater ability to create large numbers of possible responses, thus facilitating resilient action.” – Sutcliffe & Vogus, 2003
At the end of the day, no single discipline or tenet will solve any problem alone, although sense-making might be useful when analyzing the past performance or story of a company in order to understand how things went out. It is like a mapmaking process. Sensemaking also uses mental models from previous experiences and disciplines. 

I do not agree though that it necessarily is a better exercise than scenario planning because it relies on past facts, as (i) facts are not as clean as they see, afterall someone made the fact up and you don’t know in what context and motivation and (ii) in a constant changing landscape it’s better to elucubrate about the future and try to foresee through group simulations what scenarios can come up.

References:

Enacted sensemaking in crisis situations – Karl Weick

Sensemaking in organizations – Karl Weick