TESTING INVESTMENT IDEAS

“One of the best ways to get confidence in an idea is to find a smart person who has the opposing view and listen to all their arguments. If they have a case that you haven’t considered, then you should get out. But they can also help give you more conviction” Bill Ackman

“The important thing to do as analysts is to come up with a central thesis and then build the evidence to try to prove ourselves wrong” Roberto Mignone

“I stress tested my opinions by having the smartest people I could find challenge them so I could find out where I was wrong. “ Ray Dalio

“I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I’ve reached that state.” Charlie Munger

"Never stop asking questions.  Speak to as many people as you can.  Research every opposing opinion" Steve Clark

"We are very careful not to close ourselves off to opportunities to hear a well-developed counterview on any of our investments.  Vibrant debate is part of our internal process; however, there is no substitute for the argument of an investor who has risked real capital on a view that is in opposition to ours.  Without fail, this shines a light on the potential soft spots of an investment and causes us to work even harder to bottom-out the critical elements of our own thesis"  Jim Mooney

"In controlling risk, it is also very important to have people in your team whose opinions you respect, who can push back at your ideas in a way that will make you stop, listen, and test your own views" Martin Taylor

"You need a sounding board. You need someone who will say, "Why are we in this position? There is a check and balance, as opposed to being in your own world" Steve Cohen

“I try to assume that the guy on the other side of a trade knows at least as much as I do. Let’s say I buy Texaco at $52 and it suddenly goes down to $50. Whoever sold Texaco at $52 had a perception dramatically different to mine. It is incumbent on me to find out what his perception was” Michael Steinhardt

“I’m so worried that I may be wrong that I work really hard at putting my ideas out in front of other people for them to shoot down and tell me where I may be wrong” Ray Dalio

"My thought is, if there's no natural sceptic on an investment maybe it would be wise to appoint one to play devil's advocate anyway"  Peter Cundill

“Investing lies at the intersection of economics and psychology, the place where net present value meets greed and fear. It is important to know the numbers – but that is not sufficient. And it is important to know how people think – but that, too, is not enough. Both matter; it is, of course, good to buy investment bargains, but it is far better if you know why they are bargain priced” Seth Klarman

"We continually challenge ourselves by asking, "What can go wrong?" with investments we own or consider owning. By playing mental war games against our best ideas we may gain or lose confidence in an initial thesis, or perhaps come to accept that a long-loved holding should be let go. We call this stress testing process "killing the company." Bruce Berkowitz

"I work really hard to have this independent point of view, and then I bring that independent point of view out there and I say, "Shoot at it. How am I going to be wrong?" So let's have that quality back-and-forth. And so that was just a practical approach. Find people of alternative points of view and have quality conversations back and forth. Not to let them think for me, not for me to follow their point of view, but for me to understand the different perspectives. Right? Very, very practical. Because it increases my probability of being right, and it reduces my probability of being wrong. And what I've discovered in that process is that I was learning so much. So just imagine what a fantastic path to think, "Let me go after the person who has got the opposite point of view, who is really smart, and let me have quality conversations, quality disagreement."  Ray Dalio

"I constantly challenge my people to "Take me on". I want them to challenge me just like I'm challenging them. We should both be able to succinctly defend our positions on any deal. It just makes us all smarter." Sam Zell

“Why something is mispriced – is too often ignored by value investors. The general thinking is that it doesn’t really matter – if you’re right that something is mispriced, it will eventually take care of itself. We think it matters because you can conceivably avoid a lot of pain waiting for truth to prevail if you have a good read on why it currently doesn’t.” Curtis Macnguyen

“In order to invest, we need to have a sizeable analytical edge over the person on the other side of the trade. The market is an impersonal place. When we buy something, we generally do not know who is selling. It would be foolish to assume that our counterparty is uninformed or unsophisticated. In most circumstances, today’s seller has followed the situation longer and more closely than we have, has previously been a buyer, and has now changed his mind to become a seller. Evern worse, the counterparty could be a company insider or an informed industry player working at a key supplier, customer or competitor.” David Einhorn

“Investors should pay attention not only to whether but also to why current holdings are undervalued” Seth Klarman

“One of the biggest things we struggle with in training people is driving home the fact that you cannot have an opinion about an investment unless you really understand what the consensus is and are then able to articulate why the consensus is wrong.” Jon Jacobson

“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.” Joel Greenblatt

"I have a lot of ideas. Most of them are terrible. But what saved me – well, to the extent I’ve been saved – is that… I want to get people with the best knowledge and insights in each one of those key aspects and get a challenge from them." Charles Koch

"At Pabrai Funds I have several times leveraged the partners on specific investments because we have so many entrepreneurs and CEO's in our midst with deep domain knowledge. Many times when I have looked at the list and then presented it to one to three of them with my analytics and said to them "Please don't go buy the stock, but could you tell me if I'm thinking about this the right way; What's your take on it or what insight do you have that I may not know?"  Mohnish Pabrai

“The markets taught me humility.  What I found that was helpful for me was to find the smartest people who disagreed with me and try to see it through their eyes.  And by doing that I would reduce my chances of being wrong and I wouldget a fabulous education.  I think the greatest tragedy of mankind is that people keep in their heads wrong thoughts and opinions.  Options are a dime a dozen and are often misleading and are not tested ” Ray Dalio

"Whenever (a partner) brings in a new idea, I just beat the sh*t out of it ... and he does the same to me.  It's the torture test."  Marc Andreessen

"I tell people "Don't parrot back to me what I think, and don' t try to guess what I think. I want to know what you think" And I do that over and over again until the right answer pops out" Sam Zell

Disagreement is what we do a lot of.  It’s in our culture to disagree.  It’s an approach which is going to produce much less one-mindedness.  Part of our culture is to be scared of one-mindedness ”  Ray Dalio

"I have always prized leadership that isn't afraid to be challenged, that invites new ideas, and that seeks input from the employees on the ground" Sam Zell