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From Greg Wilson, chief analyst, The Legacy Portfolio: It used to be expensive and scarce. It’s now cheap and easily attainable. And it seduces unprepared investors into making bad decisions…
It’s data.
There’s a consequence of this cheap and easily obtainable information. It’s what Mariko Gordon—founder and CEO of Daruma Capital Management—calls the “Grid.”
(Gordon spoke at the 12th annual Value Investor Conference I attended in May.)
The abundance of numbers and data—this “Grid”—gives investors a false sense of confidence.
Gordon gave the example of a study done between two groups of horse bettors. The first group was asked to pick a horse using only three data points. The second group was given much more data. The researchers found that the second group was more confident than the first, but less accurate. Numbers and information give us more confidence, but they do not necessarily improve our results.
Investment opportunities lie in anomalies and areas of uncertainty.
One person was asked to watch a video of people bouncing a basketball, and to count the total number of bounces. What the watcher failed to notice was a man in a gorilla suit walking through the video. The man in the gorilla suit represents the opportunities in the market to make outsized gains.
Gordon’s conclusion: We find what we are looking for. The watcher was not thinking outside of the “Grid.”
Her solution is to think “Cloud”… to have an open mind and question data.
Here are three ways to add “Cloud” thinking to your investing:
- Have a beginner’s mind—Cultivate the qualities of the village idiot. Question everything. Be an active listener.
- Thought experiments—Use your mind to break through the “Grid.” Ask big-picture questions and develop alternate scenarios. Examine what might happen to the company you are evaluating. (For example, ask yourself what the competitive landscape would look like if the company stopped operating tomorrow.)
- Post-mortems—Look at past investments with the benefit of hindsight. Take the basketball example from above, and identify the gorilla.
Gordon used this process to make a 2012 investment in Internet radio provider Pandora. At the time, every analyst was bearish on the stock. To them, it was just a digital ad platform competing with iTunes.
Using the “Cloud” technique, she identified Pandora as a national radio station. It also had the advantages of targeting customers and being interactive.
Within a year, the stock tripled. “Grid” analysts were long the stock again… long after her “Cloud” thinking let her snap up huge gains. You can use the “Cloud” to do the same.
Reeves’ Note: Greg just shared his full notes from the conference with his Legacy subscribers. The 31-page special report is an added bonus to their subscriptions. Legacy subscribers can click here to access the report.