I believe the most important question to ask oneself in order to activate one’s diligent, investigative thinking is the following: what is it which I don’t know that I don’t know? In other words, what are my zones of ignorance 1) of which I’m not even aware of, but 2) which are potentially critical in this situation?
The investment research process often tends to revolve around finding answers to the rather obvious questions (ie. it focuses on the known unknowns). For instance, an investor will receive a confidential information memorandum and quickly get to work on validating the information provided by the seller. This is incomplete, if not wrong, as it brings the investor to work within someone else’s framework (and with the biases, mistakes and omissions generally contained therein).
In order to address the challenge of identifying the “unknown unknowns”, the following two investor attributes are crucial: intense curiosity and humility.
Intense curiosity is the part of you that will ask question after probing question until you feel that core issues have been discovered. It is the part which recognizes that real issues are usually several questions deep, but that there usually is an Achille’s heel in any situation. It is the part of you which probably likes to conduct RCA (root cause analysis) when faced with a problem. And finally, it is the part of you which genuinely enjoys open-ended thinking, researching and continuous learning.
Humility is quite simply recognizing that you are not omniscient, and that arrogance can lead to costly mistakes. It is about recognizing that ego and good decision-making don’t always go hand in hand. I really like this quote which I’ve often heard in a stock market setting: do you want to be right, or do you want to make money ? It means that you should always be open to the possibility of your thesis being wrong. You should consequently pay close attention to all the available information rather than focus on that which confirms your pre-established thesis. When faced with information that conflicts with your thesis, don’t just speak louder…start listening !
Interested readers can do some research on confirmation bias and illusion of explanatory depth to further explore these issues.
Thanks for reading.