TESTING INVESTMENT IDEAS

“A fair result can be obtained only by fully stating and balancing the facts and arguments on both sides of each question.” Charles Darwin

“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

"Testing your views is essential in operating in the financial markets." George Soros

“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

“Every trade always has two sides, so it helps if you can figure out the thought process of the person on the opposite side of the trade. Warren Buffett once wrote: “If you’ve been in the poker game for 30 minutes and you don’t know who the patsy is, you’re the patsy.” David Abrams

"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

“You should want to be challenged on everything you believe and be calm and comfortable in explaining it, and in fact, welcome any new information that disproves your existing position, so that you can immediately correct it.” Jon Boorman

"There’s no question that Charlie will not accept anything I say because I say it, whereas a lot of other people will. You know, I mean, it’s just the way the world works. And it’s terrific to have a partner who will say, you know, you’re not thinking straight... I would say a partner, who is not subservient, and who himself is extremely logical, you know, is probably the best [feedback] mechanism you can have." Warren Buffett

"Seeking out multiple perspectives on the same story will always help you figure out the truth." Jim Rogers

“Whenever you make an investment decision, it’s worth pausing to consider who is on the other side. You should ask, ‘Why might I be wrong?’” Chris Pavese

“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

“Stock prices are opinions based on facts…. Whether they’re positive facts or negative facts, if you’re a good investor, it behooves you to hear both sides of any story.” Jim Chanos

"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

“You need true diversity. If you look at our team, there are folks who have done long/short equity, long/short credit, investigative journalists and forensic accounting. You want to have a true devil’s advocacy. I would rather have internal debate and discussion rather than the markets criticizing you. When the markets criticize you, that’s expensive.” Rajiv Jain

“We are always paranoid we don’t know enough about an investment and continually play Devil’s advocate with our thesis. That does not come from a lack of confidence but rather from the notion that it is impossible to know everything. We are trying to incrementally build confidence by parrying down every volley.” Jake Rosser

“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

“Each day I shuffle in, swop trainers for slippers, pull up a pile of annual reports and set about analysing and re-analysing our investments. Routinely we try to kill our companies (they can be killed!).” Nick Sleep

"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

“One of the hacks we apply when researching a new company is to assume we are wrong. It is easy to talk about market inefficiencies but there is great value in collective wisdom and the market is right most of the time. By grounding our process in humility, we place a higher burden on proving out a variant point of view and a more honest foundation upon which to pursue research.” Jake Rosser

"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

“To perfect our own thoughts and ideas, we need to chew on and debate the ideas of others, even and especially of those with whom we disagree.” Seth Klarman

“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

“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.” Charlie Munger

"We should sit down with the people who disagree with us most. Not so that we will change our minds, because the odds of changing one's mind through a simple conversation are about a million to one against, but rather so we can hear the opposite side of the argument. If we can't find the logical flaw in the argument, we have no business holding our view as strongly as we probably do." James Montier

“We use the Socratic method: lively cooperative debate designed to stimulate critical thinking and test assumptions. Relevant new information is constantly reviewed, as we restlessly seek new opinions and insights.” Baillie Gifford

“Testing our beliefs requires that we ask, ‘What evidence is there that could disprove my hypothesis?’ Testing the alternative hypothesis is the simplest strategy for removing bias from decision making. This is why we begin every investment discussion with a simple question, ‘How might we be wrong?’ And once we have identified the key risks, we consider the probabilities of each scenario as well as the consequences of being wrong.” Chris Pavese

“The last step in our research process is to invite in a Wall Street analyst who is a bear, and they come in and make a pitch why we shouldn't buy this stock. We want to see if the reason they don't like it is if they see a real structural flaw in the business that we didn't pick up on, or if it's just that they don't know what's happening.” Richard Pzena

“We are keen to hear external perspectives as well. The discipline and rigour of fresh challenge is vital to remaining open-minded. We will continue to seek out individuals who can help us to see the portfolio through very different eyes and thereby increase our chances of insight.” Baillie Gifford