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Artist: Eric Hopkins, Waypoints #2

Eliminating Investor Biases


Waypoints Release 161 and 163 October / November 2012
In this Waypoint originally issued in two parts, we grapple with six common investor biases: Availability Bias: Giving higher priority to ideas we think of at all or think of first. Substituting Questions: When faced with a difficult question, we instead find a related but simpler question that we can answer, but does not address the real, difficult question. Affective Error: Emotional caring that can lead to delusion and falling victim to herd mentality. Representativeness Error: Mistakenly applying patterns. Search Satisfaction: The tendency to stop searching once one big discovery is made. Commission Bias: A tendency toward action rather than inaction. Brynne Thompson, CFA brynne@coburnventures.com Pip Coburn pip@coburnventures.com David Bujnowski dave@coburnventures.com Dan Sigler dan@coburnventures.com

2011 Coburn Ventures, Inc. All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, information storage and retrieval system, without permission from Coburn Ventures. These materials and information are provided by Coburn Ventures, LLC and may be u informational purposes only--not for any investment purposes. Coburn Ventures, LLC and/or any affiliated entities may be involved in trading or dealing as princ securities (or in options or other derivatives based thereon) of companies mentioned here or referred to in the materials and information made available here from time. In addition, Coburn Ventures, LLC or its affiliates, members, shareholders, directors, officers and/or employees, may from time to time have long or short po in any such securities or in options, futures, or other derivative instruments based thereon. By viewing these materials, you represent that you have read and und our terms, conditions and policies (see www.coburnventures.com) and you agree to be bound by these terms and conditions.

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What exactly is Coburn Ventures?

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What we really do for a living is to understand as much about change as we are able. We combine anything we have learned about change over the past 12+ years with our domain expertise in global technology, telecom and media markets as the foundation of all we do. We specifically look for monumental change and see it happening continually in the world though the assumption we see humans and investors as a subset of humans living with is generally that incremental change is the type of change that usually occurs when change occurs at all. Our investment philosophy is as follows: look for positive and negative monumental changes around which we are able to develop high conviction. The underlying presumption is as follows: When a change event occurs, the inherent value of an enterprise may immediately change as well though it is hard to get ones arms around or calculate just how much. The investment community, however, may require a period of years to truly comprehend and correctly value the shift that has occurred as a result of the change event. If we are able to generate high conviction and clarity about specific changes we will be able to invest now and be rewarded as the broad investment community comes to appreciate and adjust to the new inherent value of the enterprise over time. As a compass for our activity, we developed a methodology called The Change Function. The Change Function is a framework for determining whether or not a change will actually occur: Will a new product or technology get adopted? Will there be new ideas about how to use technology? Will a proposed industry restructuring be successful? And so on. The Change Function simply says that a change really equates to a change of habits. We believe the change of habits is extremely difficult. Habits are only changed when the immediate level of crisis on a scale ranging from total indifference to flat-out crisis outweighs the total perceived pain of adopting a potential new habit that promises a solution to the crisis. This is a fancy way of saying that the condition for change is that it becomes more painful not to change than the perceived pain in changing. So what we do is study change and apply both what we know and our own mental models to decipher the likely direction of the global technology, telecom and media markets. None of all of that is a business but rather hopefully a foundation for business opportunities. Coburn Ventures is named Ventures as a reference to multiple activities as opposed to indicating we are in the venture capital industry. We intend to pursue a series of advisory opportunities across time all aimed at helping provide increased clarity and conviction for our clients as they go about making decisions in the markets in which we specialize. Waypoints is intended as one of those services. Waypoints will include applications of our philosophy as building blocks for our bottom up analysis of companies and stocks. If you are a current subscriber, thank you for joining us on the journey and if you are contemplating joining we would love to have you along as we go.

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SIX INVESTOR BIASES TO VANQUISH!


The significant problems we face cannot be solved at the same level of thinking we were at when we created them -Albert Einstein
This may sound odd but One of my favorite things about being an investor is how difficult it can be! There is never really a clear cut answer. There isnt a way to know Im going to win. Its pretty objectively clear when Im possibly wrong. Its a very, very human undertaking. With human limitations. And human mistakes. But, because of all that, there is always a chance to improve, to see something just slightly more clearly, and to test out new thinking another day. Thats what this Waypoints series is about: Putting all the human limitation and mistakes in our investment process under the microscope to see what we see. Well do it by looking at common investor biaseshuman cognitive errorswhich, if we fall victim to, can lead to a repeat cycle of poor decision making, limited thinking, and wasted time, but if we can start to be aware of, to handle, and manage, will lead to less tracking error, more insight, and deeper conviction. Much has been superbly written about investor biases and decision-making biases with a seemingly implicit idea that they are easy to overcome, but there is little or no practical action to employ to work on vanquishing these biases from my life! The whole point of this piece is to share ideas and tactics for eliminating investor decision-making biases. Well cover six biases in all, in two Waypoints pieces.
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Our methods may not match up 100% with what will work with you and your own investment process, but I hope these ideas can apply to some degree for any investor aiming to improve results from decision-making, and at a minimum serve to inspire ideas specific to your team, your process and your culture. With that, here are three biases that weve been exploring, and a few of the tactics that we have either folded into the fabric of our process or that we are experimenting with or recently brainstormed. For more of our thoughts on our method we will happily send our 70-page piece on our investment philosophy and process. I hope this helps spark some thinking for your own work. brynne

When you improve a little each day, eventually big things occur Not tomorrow, not the next day, but eventually a big gain is made. Dont look for the big, quick improvement. Seek the small improvement one day at a time. Thats the only way it happens and when it happens, it lasts John Wooden

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BIAS #1: AVAILABILITY BIAS


What is availability bias?
The availability bias prioritizes ideas and examples that come to mind first and gives those ideas and examples a higher probability of occuring or being right. Availability bias includes recency bias, which is the simpler idea that ideas thought of most recently carry the highest priority.
Your mind says: if I can even THINK of it, it must be likely, or at least important! Example: I notice I may have higher conviction in a company because I just did a round of work on that company or I simply spent more time with that management team or working on that company. It fills more of my brain! While our thinking colors all our experience, more often than not our thoughts tend to be less than completely accurate. Usually they are merely uninformed private opinions, reactions and prejudices based on limited knowledge and influenced primarily by our past conditioning. All the same, when not recognized as such and named, our thinking can prevent us from seeing clearly in the present moment. We get caught up in a thinking we know what we are seeing and feeling, and in projecting our judgments our onto everything we see off a hairline trigger. Just being familiar with this deeply entrenched pattern and watching it as it happens can lead to greater non-judgmental receptivity and acceptance Jon Kabat-Zinn

THE PROBLEM AVAILABILITY BIAS PRESENTS:

DISTORTION OF CONVICTION LEVEL

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What tactics might help offset Availability Bias?


#1: USE DATA TO JOG THINKING ABOUT ALL COMPANIES IN THE PORTFOLIO
When it comes to portfolio management, we put controls in place aimed to jog our memory for EACH company in the portfolio and each candidate in the portfolio, instead of relying on what thoughts happen to be coming up for us individually or which events happened recently. In other words, we re-contextualize information into our wide pool of data before taking any action. To incorporate this portfolio management tool with the whole team of analysts, we use an integrated decision engine that reminds us of changes in estimates, our base conviction level, share price movements and expected range of outcomes, as a few examples. As a team we review this sheet of data together, and it helps neutralize coming to a meeting with an idea that Im particularly jazzed about one day without looking at it in CONTEXT with our entire portfolio. Pips Add: A comment about teamwork: We consider investing the ultimate team activity because a well-functioned, superbly communicating team committed to excellence as a group will act in a way to half most every bias. Team members implying trust will look out for one another who might be on the verge of acting based on a bias.

#2: INTENTIONALLY CHOOSE MY INPUTS: AWARENESS OF WHAT I LEARN THROUGH OSMOSIS


What air am I breathing?
When I first joined Coburn Ventures 6+ years ago, one of Pips first directives was to stop watching any CNBC. This was not a wholesale rejection of CNBC, but it was a rejection of what he thought CNBC would bring into our culture that didnt fit at all with our specific investment process. In other words, if CNBC was in my air, and I was so used to it because I was coming from a big sell-side firm that blasted CNBC 24/7 on the trading floor, it was important that we remove that input from my air and intentionally choose new inputs that better matched our process.

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Over the years Ive noticed that there is much more to go on just becoming aware of what my inputs are: If Im in an airport I inevitably succomb to watching headlines scrolling on omnipresent TV monitors, and wait, wasnt I rattling off some thinking about the possibility for a double-dip recession the other day? And wait, was the source of that thought really just a 20 character rolling headline from an airport CNN monitor? Oh my. I call this one HEADLINE OSMOSIS. It happens for me with web browsing, when pulling up a web homepage, or scanning Facebookall of these are inputs in my air. So its helpful for me to continually ask myself throughout the day while reading, researching, web searching:

Does this input make the grade? Is it what I want in my brain? Does it support the investment process I believe in? Does this input lead me into biased thinking, or help me avoid it?
Example: ANCHORING and ENTRY POINT DATA What DATA do you choose to examine every day or every week for your portfolio? We believe the data we take in WILL affect which biases we fall into. MINI-TACTIC: We want to include data that will keep us as far away from ANCHORING as possible, so we dont include entry price points ANYWHERE on the investment sheets our group reviews weekly. Anchoring is a second cousin to availability bias, in which the data about what our entry point was could give that piece of data higher weight in our decision-making than we want.
Pips Add: We have long considered data on entry points incredibly ego-centric in that the market doesnt care one iota about OUR entry point or whether we have paper gains or losses. So we wont track it! The best way to avoid ones paper profit or loss from impacting action is to forget whether you have a paper gain or loss to begin with! Next, after identifying and cleaning out whats in your air, there is the FUN part of choosing what type of air you want to be in!
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Looking at all the sources of information we have today and saying WHAT MAKES THE GRADE? What of this plentitude of information do I actually WANT in my head? Which newspapers, blogs, writers, TV shows, books, investors and thinkers do I think are GOOD ENOUGH to LET IN?

THE GOAL: KEEP OUT NOISE, LET IN SIGNAL!


This way I am cultivating my own curriculum as best as I am able and with as much awareness and insight as I can musterso that I am actively evaluating what Im spending my time reading or who Im talking to, which trips to make, which gatherings to go to, based on this constant question: Does this input make the grade? Will it expand my thinking? Will it keep me from falling into common biases?

Recognizing that I WILL experience availability bias, am I at least filling my brain with inputs that will help me?
Do my inputs help me identify SIGNAL from noise?
We consider that our job is to effectively and efficiently detect the relatively small amount of signal that exists inside the tremendous pool of data which for our purposes is largely noise. If we are unintentional about our inputs, and unaware of what we are recklessly letting into our brain through osmosis, then Availability Bias is more and more likely to seep into our investment work, increasing the tracking error between our business thesis and reality.

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But, if after a few days of looking around and thinking about what might be in my air, and then thinking about what noise I want to vanquish from my air, and what signal I want IN my air, I experience increased peace of mind and clearer thinking about my investments! I love this type of project, as it helps me consider that I am not victim to my environment (not completely, I surely do realize that my brain is not capable of filtering out noise as strongly as I wish!), and that Im less likely to fall into a herd mentality from headline osmosis, and that Im on a path to wisdom instead of squelching my learning and limiting my growth by actively CHOOSING my inputs.

#3: ASK QUESTIONS IN MY INVESTMENT PROCESS TO DEVELOP AWARENESS OF AVAILABILITY BIAS:


What ideas and concepts and stories are coming to the forefront of my mind, simply because it is what I am exposing myself to, or what my life experience has been?
Example: I could think most successful technology companies are based in Silicon Valley, because I have many experiences of analyzing successful Silicon Valley-based technology companies. It may be something that simple.

Am I coming up with in an investment thesis that is too heavily weighted toward MY experience rather than what might be closer to reality?
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Example:

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I live in Manhattan. Almost everything I consume is either delivered to my doorstep or available to me within a three block radius. This is not a normal consumer experience! Not at all! If I walk around thinking my experience and my life represent the norm, my conviction will be skewed toward companies and investments that relate to my life experience but may not reflect the reality of consumption for most of the world. Pips Add: There is nothing at all wrong in starting with an idea that originated from my own experience so long as there are enough follow on steps of research that combat any such bias through a defined process. In our case we allow nearly anything into the top of our investment funnel knowing that any idea must go through at least eight rounds of successful investigation before actually getting in the portfolio plenty of opportunity to combat most any bias.

BIAS #2: SUBSTITUTING QUESTIONS


What is Substituting Questions?
Substituting Questions is a heuristics (shortcut) or bias that Dan Kahneman lays out in Thinking, Fast & Slow. He calls it Substituting Questions and it involves our tendency to devolve and create a simpler question to answer when the *real* question is too challenging. Dan Kahneman claims we do it all the time and dont even realize were doing it:

I propose a simple account of how we generate intuitive opinions on complex matters. If a satisfactory answer to a hard question is not found quickly, System 1 (his nickname to describe a part of our minds thinking) will find a related question that is easier and will answer it.

Whats an example?
Heres how Kahneman describes it:
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The target question is the assessment you intend to produce. The heuristic question is the simpler question that you answer instead. Here are some examples: Target question: How happy are you with your life these days? To answer this question, I would want to explore many very deep questions and issues in my life: what is the quality of my relationships? Am I devoted to my work? What is the state of my physical health? Do I treat others well? These are all big questions that provide an input to answering the real target question around happiness. But each question is difficult to answer without real examination. Whats an easier way to bypass going through the emotions that such an investigation could bring up? Create a simple question that only requires a simple, surface answer. Such a question might be: Heuristic question: What is my mood right now? Target question: This woman is running for the primary. How far will she go in politics? I could explore her views, her background, ask about her to others who have experience working with her. All which would require some time, some work and some thinking. Instead, I could say: Heuristic question: Does this woman look like a political winner? (Many suggest this is most votes ONLY basis for decision-making on political candidates!) the mental shotgun makes it easy to generate quick answers to difficult questions without imposing much hard work on your lazy System 2

Now, lets transfer this over to investing:


Target question: Should I buy shares of Apple? Can quickly turn into: what data can tell me how Apples business is performing right now or in the next three months so I dont have to understand more about the competitive environment or have a view on how users think of Apples products or what ability management has to handle the big societal changes coming their way, or in other words: Heuristic question: Will Apple make the next quarter? Here are a few more examples: Target question: Does this company have a NODE #3 sustainable competitive advantage? Heuristic question: What is this companys market share? Target question: Will Microsoft succeed with the Surface Tablet?
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Heuristic question: How do its specs line up compared to the iPad?

THE PROBLEM SUBSTITUTING QUESTION PRESENTS:

STUCK IN SMALL AND LIMITED THINKING!


IF the REAL question cant be answered, or at least, I cant answer it, that is OK! All it means is my conviction is going to be lower and THAT it is important to know and not be delusional about!

What tactics might help offset Substituting Questions?


#1: DEVELOP UNKNOWABLE BURNING QUESTIONS
This tactic is about keeping our minds open and our questions big, AND to become comfortable in it being OK that we dont know everything, that were human, and complex questions ARE difficult to process cleanly! The more comfortable we can become sitting in this uncertainty, the less likely are minds are to push down into small and limited thinking. Heres one tactic I consider is helping us move along this path: unknowable burning questions: We generate a pre-determined game plan well before taking a position that includes the following: -A stated business thesis -3-5 Statements suggesting where we think the thesis will be WRONG after the fact -3-5 Burning Questions core to affecting our conviction in the thesis -Relevant operating model metrics -A 1 year share price chart The portion of this tool that I think is most helpful to Substituting Questions is our Burning Questions. At the surface, they may look like typical maintenance-research questions, and some of them are. But we have a core philosophy to generating these questions that is reflected in probably 50% of them: the questions may well be completely UNKNOWABLE. Even if we allocated the next year to answering these questions, we would not get there. Here are a few examples: ARM: What will ARM do with its excessive business success? Bang & Olufsen: What was it that convinced Apple to sell B&O products? How sustainable is the relationship?
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Google: Is Google mangement actually becoming more effective? MOBILE + DISPLAY: What are these two segments contributing to Googles overall growth? What trend-line does this leave core desktop search on? WW. Grainger: How often do orders go unfilled when a client shops at a mom & pop? Do Graingers 350k SKUs really make a difference? Mercado Libre: COMPETITIVE ADVANTAGE: Why exactly do users choose to purchase something on Mercados platform rather than a competing one? More inventory better prices better user experience?

So why have Unknowable Burning Questions?


Two reasons: 1) If we limited ourselves to Burning Questions that we THOUGHT we COULD answer, we would only think of simple, likely mediocre, likely completely unhelpful and unfurthering questions!! Instead, we want to pinpoint what the key question is, no matter if it is unknowable or not! We do NOT wish to squelch our thinking, but to expand our thinking about what might truly matter. 2) Second, and maybe even more important, is: Questions that we think may be unknowable today may not be in the near future! We have SO much more access to data and information of all sorts today. If we dont train ourselves to think of big questions, we wont see the big ANSWERS in the data and information staring us in the face.

By allowing and encouraging unknowable burning questions, we are attempting to develop more and more patience resting with and grappling with the uncertainty that is inherent in investing, for not having immediate answers, for understanding that there is tremendous learning in coming up with the question in the first place. This requires some patience in our culture, and appreciation for learning and studying without having to SHRINK limited thinking down to create a sub-par answer. I consider that sub-par answers can be as damaging as WRONG answers. Pips Story: One day about six years ago I was running on the streets of Pleasantville, NY. As I was just passing the intersection of Bedford Road and Wheeler Avenue it struck me like lightning. I realized that I had a a deep habit of conditioning my questioning to questions that I thought I could get answers to as opposed to the questions that mattered most! I grew excited as I realized it would be now overcomable.

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#2: REMIND OURSELVES THAT A THESIS IS NOT REALITY


A business thesis is really just an idea or thought that exists in ones head. It is an abstraction! It is a HYPOTHESIS only. It is not reality. So we aim to remind ourselves that a thesis is not reality: it is just our best effort at coming up with our model that is as close to reality as possible, is a tactic for RESTING in the unknowable. The idea here as it relates to combatting Substituting Questions is simply that the more we can rest in this thought that we do not and cannot KNOW reality, the less resistance we are going to have to handling very difficult questions to which we do not have an immediate answer. Any defensiveness I have about my thesis can be tossed aside if I admit to or recognize that my thesis is inadequate by its very nature. We think that oftentimes folks get confused that the thoughts in their head ARE reality as opposed to a **thought about** reality! When you hear someone say "what is really going on is..." it is often times to look out! We develop thoughts that are skinnied down version that we hope explain reality in a useful way but our mental models will never be the same as reality! They are nonetheless potentially very useful so long as we are aware of the tracking error between the thought and reality. We find that realizing this difference can help generate humility immediately. From that point we can be free to recognize our mental model (e.g. Investment thesis) can be always improved upon. So each day that is our task: generate a better investment thesis that has less tracking error with the real world. Pips Add: By building in the expectation of improvement into our process well beyond taking a position (in fact, expecting improvement forever), we are accepting and revealing the inadequacy of our thinking systematically! Well, you cant admit THAT! Why not?! Its true! The question thankfully isnt whether our thinking is perfect because it isnt! The question is whether our thinking and philosophy and process can allow us to systematically make money! Perfection is not a requirement but the pretension of perfect thinking will almost certainly result in foolhearty defensiveness and losing clients money.

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#3: VANQUISH URGENCY TO DO: TO TAKE A POSITION, TO MAKE A TRADE, TO HAVE AN ANSWER
The more urgency there is to DO or to be addicted to simple, easily accessible but FALSE TRUTHS the more likely we are to oversimplify to come up with a simple question and potentially sub-par answer instead of waiting, not doing or acting, until the right question and answer are with us. This will be different for every culture and match differently with every investment process. It is my impression that many of us individuals in the investment world have a tad of brashness or machismo in us in that we love to have an answer for everything, it seems to be one common way to pick out pecking order in our chosen field : the brashest, loudest answer wins! Well, maybe not! But, were only human. We do NOT have answers for everything, if we think we do, were probably falling into the substituting questions bias. As a further aid, it has helped us, we think, to indicate our conviction level in various opinions from high conviction to low conviction.

BIAS #3: AFFECTIVE ERROR


What is Affective Error?
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Affective Error is emotional caring that typically leads to a higher level of delusion in otherwise objective analysis. Affective Error provides a shortcut by coming up with an emotional story about a company, a management team, or even a thesis.
Because we are HUMAN and emotions RESONATE and stick with us, we are particularly drawn to ideas that are soaked in emotion. It happens largely without our awareness. It is hugely facilitated by stories, as stories are easier for us to remember and the emotions stick with us. I suspect that Affective Error is actually one of the most prevalent biases in our industry. The universe of possible public equity investments is HUGE. We gravitate to methods that offer shortcuts. Theres nothing wrong with that. The problem is that in our industry we seem to have amped up the cuteness and casualness of this shortcut. Companies are reduced to nicknames and then down to ticker symbols, ticker symbols are reduced down to yet another nickname for the ticker. Female CEOs are referred to by their first name. Male CEOs are referred to by their last name. Investors walk around talking about management toneits endless. We are looking for shortcuts and Affective Error injects emotion so its easy for our mind to hold onto but replaces real thinking. Because of that, Affective Error is one of the errors that is HIGHLY likely to lead us into HERDING and GROUP THINK: Our stories become COMMON STORIES and then are suddenly espoused as the COMMON WISDOM Stories are mainstream, short-run, popular currency on Wall St. but thinking and analysis is the currency of business analysts who couldnt care less about affective error and being popular in or driving herd thinking. Consequently, we have outlawed the phrase story in favor of investment opportunity.

Whats an example?
Turnarounds can be incredibly attractive and lure us in with drama and the potential for overcoming huge obstacles. It can be attractive to imagine a story of incredible against-all-odds turnaround, but mostly, we are caught up in the emotion of the story, and then miss all the practical challenges that are required, or the incredibly complex nature of the turnaround.

Attraction to Overcoming Odds or Massive Dreams of Success

Rooting for Underdogs


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Its very human to just really want a company or management team or product to SUCCEED. Success is great. Rooting for success seems absolutely harmless, and it many ways it isbut if its a company that I am supposed to be analysing as clearly as possible to be able to SEE how close or far away my thesis is from reality, then rooting for CLOUDS that judgment.

Any Rooting At All!


Pips Story: The tech scene in the 1990s was filled with trade show promotional items like golf shirts, bags, mugs, pens. One day in 1997 I came home and I threw ALL my gifted promotional items away, including a white with red collar and trim Lucent golf shirt as well as a burnt orange Cisco golf shirt. GONE! These items had zero, zero place in my life of being an analyst. They might only sway me into an unwanted emotional state. I have come to more easily separate my admiration for leaders or cultures or products from my task to analyze using our specific investment philosophy.

Being a Part Of
The Facebook IPO Roadshow was a striking example of what it seemed like was an emotional pull to be a part of something. How many hours were wasted on having to come to an opinion on Facebook, maybe even as an excuse to go see Zuck?

THE PROBLEM AFFECTIVE ERROR PRESENTS:

INSTEAD OF SEEING REALITY CLEARLY, WE BECOME ATTACHED TO A STORY; INCREASED LIKELIHOOD OF HERDING AND GROUP THINK

What tactics might help offset Affective Error?


#1: USE CLEAR COMMUNICATION THAT DIFFERENTIATES EMOTIONS VS. THINKING
One of the most useful things to note about Affective Error is that it most easily disappears when we are forced to present our THINKING about a company or management team instead of our EMOTIONS.
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The easiest way to do this?

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Demand thinking and outlawemotion-speak!


To get more specific:

#2: CUT OUT EMOTION WORDS!


Question: If you are a portfolio manager and your analyst communicates the following sentence to you, what do you do ? Im comfortable with the quarter/estimates/consensus Answer: How could you REALLY take a high conviction action after being offered this so-called thinking? What Im comfortable with may be hugely different than what Pip is comfortable with or what Dave is comfortable with. And if Dave or Dan or I were ever to come to Pip with thinking that is actually only reflecting our emotions about the question, Pip has no magic emotion translator to translate my level of comfort into what it means for HIS comfort. Eliiminating emotion words can have the profound impact of taking away the subjective uncertainty embedded in our communication. It is very NORMAL to walk around with emotions, and the power in analysis comes in separating and seeing clearly what is emotion and what is real thought. Good news: Emotions are generated from thoughts. We might get scared because we THINK there is a prowler in our house! Further good news: While we cant interfact at an emotional level because my idea of comfort and Pips can be distinct, we can interface effectively at the logic level! So when we hear emotion-speak we can ask what is the thought that is generating that feeling? I am comfortable with the position size What is the thought behind that feeling of comfort? I think the management is capable of handling this product transition.
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Oh, well I fully disagree so I am not comfortable at all!

#3: USE FULL COMPANY NAMES AND MANAGEMENT NAMES


Around the Facebook IPO we heard a lot of folks talking about Zuck. Im going to see Zuck. Really? Neat! An outside observer might actually be thinking, wait, is that guy FRIENDS with Mark Zuckerberg?? Using a nickname connotes knowing. (George W. Bush was great at doling out nicknames, partly perhaps as a practice of disarming. Its the same for investors! Only were dealing with actual investments, not personal or political relationships!) Using the FULL name reminds our brain that we do not KNOW this person or their character, AND that we wish to take our craft seriouslynot to treat it as a game. It is SO incredibly easy for certain CEOs, take Steve Jobs as an easy example, to turn into personas. Once a CEO has become a persona there is an emotional story about WHO this person REALLY is. If I buy into that, I walk around thinking I KNOW this person. I consider them too often as awesome or terrible. When I implicitly decide I KNOW this person, I could start to have higher conviction that I KNOW what decisions this person will make. That is delusional thinking. One last trap to point out is how much faster this process happens for women CEOs: Most female CEOs are suddenly refered to by their first names Carly, Meg, and now Marissa. Perhaps because they are anomolies to the pattern, we are even more likely to have to create a personae for them that can lead us astray in assessing their management ability. They dont compute with the typical pattern, so we create a shortcut for our brain to make them compute.

#4: CUT OUT TICKER SYMBOLS AND COMPANY NICKNAMES


This is another variation on the idea of using full names instead of shortcuts or nick names that carry a story with them. Open Wave one day became Open Grave theres a lot of bias inherent in that
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nickname! One of my favorite used to be the traders calling Synopsys, ticker SNPS Snaps. Its seemingly harmless, and fun, but it still takes me away from considering the COMPANY I am working on. Its not a ticker symbol, its not a nickname, its a COMPANY that Im considering for investment. Unless we are referring specifically to the ticker symbol of the equity we NEVER substitute a ticker symbol for a company name and we dont use playful company nicknames. If we act casually our thought is that our thinking will drift away from serious and crisp thinking. Similarly, we dont say the company or stock is acting weird or hairy or talk about managements mood. We consider these traps to really thinking through what may or may not be important investing or trading questions. We dont say what names do you like?Names? You mean companies? By cutting out ticker symbols and company nicknames we wont confuse security price analysis with fundamental analysis. We wont confuse the connotations implicit in company nicknames with the REALITY of what that company is about or how it is performing.

#5: DEVELOP AN AWARENESS OF MY AFFECTATIONS!


Sometimes all that is required to squash affective bias is the awareness of oh, Brynne just WANTS this company to succeed! and the portfolio manager or investment team can layer on what they think is a more objective viewpoint. This is part of how a functional investment team can start to help one another handle these biases. Pips Story: It took about 18 months back in the 1990s for me to realize I had a fondness for turnarounds! What a terrible way to lose peoples money! I got over it quick!

PART II THREE (more) INVESTOR BIASES TO VANQUISH!


The significant problems we face cannot be solved at the same level of thinking we were at when we created them -Albert Einstein

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This is our second in a two-part series on eliminating common decision-making biases for investors. In this piece, we work on representativeness error, search satisfaction and commission bias. So much has been superbly written about investor biases and decision-making biases with a seemingly implicit idea that they are easy to overcome, but there is little or no practical action to employ to work on vanquishing these biases! The whole point of this piece is to share ideas and tactics for eliminating investor decision-making biases. Our methods may not match up 100% with what will work with you and your own investment process, but I hope these ideas can apply to some degree for any investor aiming to improve results from decision-making, and at a minimum serve to inspire ideas specific to your team, your process and your culture. With that, here are three biases that weve been exploring, and a few of the tactics that we have either folded into the fabric of our process or that we are experimenting with or recently brainstormed. For more of our thoughts on our method we will happily send Part I of the biases work and our 70-page piece on our investment philosophy and process. I hope this helps spark some thinking for your own work. brynne

When you improve a little each day, eventually big things occur Not tomorrow, not the next day, but eventually a big gain is made. Dont look for the big, quick improvement. Seek the small improvement one day at a time. Thats the only way it happens and when it happens, it lasts John Wooden

BIAS #4: REPRESENTATIVENESS ERROR


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What is representativeness error?

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My thinking and analysis is guided by a pattern, but I fail to consider possibilities that contradict the pattern and thus attribute the signals to a pattern where there is instead an anomoly.

Whats an example?
Let me preface these examples, as they arent directly from the world of investing, but from the world of medicine. wait medicine?? Yep!! One of my favorite investing books that on the surface has zero to do with investing is How Doctors Think, by Jerome Groopman. We studied it in a small group at the Sundance Retreat this year. Im going to refer to it in this section on representativeness error because I think representativeness error is one of the most common investor biases that is so, so difficult to tackle: it lies in this gray area between developing phenomenol skills of PATTERN RECOGNITION and having over-simplified pattern recognition that isnt supported by a strong investment process and therefore leads to poor decision making. When there is a case in which the error or bias is so close to home, so in the air I breath, I find it all the more important to be able to distance myself from it a bit to look at it from another angle. The book How Doctors Think helped me do this by diving into the cognitive errors doctors face, with HUGE consequences (think: humans dyingvs. a bad stock pick for usnow theres some perspective!) and how the doctors work through and aim to improve their ability to avoid these errors that have such disastrous results. So, here first are the examples of representativeness error from the medical field, after which Ill tie them to investing.

EXAMPLE #1: APPLYING PATTERNS INCORRECTLY


[Dr.] Croskerry told me how his eyes had fixed on McKinleys trim frame and his elegant olive uniform, and how the rangers physique and chiseled features reminded him of a young Clint Eastwood all strong associations with health and vigor. Yes, there were unusual aspects to McKinleys angina; his pain was not typical of coronary artery disease, nor did the physical examination and tests point to the heart. But, Croskerry emphasized, that was precisely the point: You have to be prepared in your mind for the atypical and not so quickly reassure yourself, and your patient, that everything is okay. (p 44) Here, the doctor thought he saw the typical prototype of a healthy Clint Eastwood. Instead, the patient had a fatal heart problem.
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He missed those symptoms that would have led him down the path to discovering the heart problem because he took a shortcut: assessing the patients physcial appearance without checking all the boxes that might have led him to come to a completely different conclusion. To translate this to investing, representativeness error is what happens when we believe we are seeing a pattern, and we miss the clear signals that this particular case does not fit the pattern it is an anomoly. We get STUCK in the pattern, instead of helped by it. A simple example is grouping all companies into a certain industry as the same, or identifying buckets of theme companies when it is unlikely that all of their businesses really fall into the same pattern completely.

EXAMPLE #2: BLINDLY FOLLOWING UNEXAMINED PROTOTYPES


An even more prominent problem representativeness error presents is that we take all these patterns we have identified as truths, relying on them to the point of error and even lazy thinking. We use our teaching and training as our pattern recognition, but we may not realize that we took this teaching and training as the truth, and never thought to question or examine it! "Why do you stick the needle under the xiphoid?" [Dr.] Lock asked. I paused. "Because that was how my teachers taught me in my training." "And why do you think your teachers taught you the way they did?" Lock asked. "Because that's the way THEY were taught." (p. 134) Here, a prototype was left unexamined. A procedure was done the same way over and over again NOT because it was the best way but because it was ok therefore was left completely UNEXAMINED. He later says: "The big problem is that most people assume that once it's [the procedure] made up, it's actually real. Especially the people who make it up themselves. Then they think it came straight from God." Heres where applying this thinking to investment gets really useful. I dont think we even have the STARTING POINT of great prototypes! In fact, the prototypes and industry thinking we start with may be massively faulty! What an awful place to start.
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Unlike medicine and other disciplines, we dont have many institutional prototypes that are handed down. We dont have a science, thats for sure, but we also dont have great thinking on what it means to be an investor. Only a handful of great investors are studied but more often than not investing includes a huge hodge podge of activities, most of which I would argue are about TRADING or TRANSACTIONS, and not investing. I am completely fine with this idea that there isnt a science to investing, but where I do get my antennae up is when I observe that this lack of thinking opens up a HUGE VACCUUM for others to fill if we let it. And who or what fills that vacuum? CNBC, trading blogs, and in general, transaction oriented, completely temporal, completely unexamined thinking. This means that not only are we grappling with representativeness error, using prototypes instead of examining our thinking, but we are working with unhelpful prototypes much of the time: Putting the needle in the xyphoid may not have been the best option, but at least it was a procedure that worked MOST OF THE TIME. I cant say that about many of the prototypes or rules of investing. We accept the common wisdoms (likely herd thinking) of what will happen in the market, We spend time thinking about why the market acts this way or that, We have a vague definition of what a blue chip company is or, What investing strategy works for the long term (buy and hold, data point investing, etc.)

all mediocre thinking about investing that we leave unexamined at our peril. This is the wonderful puzzle of investing why it never gets boring! but its not simple. Leaving our common wisdoms unexamined, letting them be our guiding patterns to look for, will OVER simplify our thinking, leading to poor decision making.

THE PROBLEM REPRESENTATIVENESS BIAS PRESENTS:

OVER-SIMPLIFIED PATTERN ANALYSIS AND UNEXAMINED THINKING LEADING TO POOR DECISIONS

What tactics might help offset Representativeness Error?


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#1: WRITE DOWN AN INVESTMENT PHILOSOPHY


If we take this idea that we are working with prototypes that arent very useful or very developed (e.g., buy and hold beats the market in the long run) AND I think that I am working with thinking that is unexamined then the opportunity is to take those prototypes and that unexamined thinking that has been passed down to me and wrestle with it. One of the best ways Ive been working with that this year is by working with Pip writing and revising the Investment Philosophy for the Coburn Ventures Buckeye Fund and for a new model portfolio, Oakley. In other words, I now have a method for bumping up against thinking that I took as the truth when I first started in the industry or studied for the CFA exam and can now say, THIS is what I believe. Through deep examination I am forced to consider what I truly believe in and whether my processes are synched p with those beliefs. One of the great services we think a money manager can provide clients springs from a mentality of a student's mind that is open to being wrong and learning more. IF I put myself in the position as "final word", well, when the data arrives disproving my thesis the odds of defensiveness and denial sky-rocket! IF I am of a student-mind the new evidence will be properly or approriately weighed and a new enhanced thesis will evolve. To be clear, it is EASIER to look for prototypes! It is EASIER to stay comfortable in looking for the patterns we think we KNOW! This is why we fall into the trap of representativeness error time after time. Keeping a students mind, and keeping a work in progress investment philosophy may be one way to keep your brain actively defining what it is you THINK you know, such that you can keep challenging your thinking with new ideas.

#2: WORK TO REDUCE TRACKING ERROR


WHAT WE KNOW IS ONLY BASED ON A MODEST LEVEL OF UNDERSTANDING
This is the most complex but to me, most interesting tactic to combat representativeness error. It pulls again from that example from Dr. James Lock in How Doctors Think and relates it to the TRACKING ERROR that we experience as investors as our THESIS can never be REALITY: Without me giving you too much background, Groopman is writing about Dr. James Lock, Chief of Cardiology at Boston Childrens Hospital. He is a doctor that has to do extremely tricky surgeries, many times on the hearts of very young children. He was obsessed with Sherlock Holmes as a child the deduction and reason that was used for sleuthing. He compares that to the work he does diagnosing problems in childrens hearts. We can use the same parallel when thinking about how to research and form a thesis (diagnosis) for investments Heres how Lock talks about bringing investigation into his work what works and what doesnt:
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Like his hero Holmes, James Lock ponders the nature and interpretation of available evidence and tries to imagine a better future. I keep an ongoing tap, he said, on how I know what I know. (THAT is my favorite sentence in the book!) Epistemology, the nature of knowing, is key in my field. What we know is based on only a modest level of understanding. If you carry that truth around with you, you are instantaneously ready to challenge what you think you know the minute you see anything that suggests it might not be right. Pips Add: To be of a students mind I practice telling myself I really dont know anything about this in the grand scheme of things and I have sooo much to learn! until I believe that without ever being paralyzed by the fear or defensiveness of thinking such a thing. Reminding ourselves that a thesis is not reality, it is just our best guess at coming up with our model that is as close to reality as possible, is a tactic for RESTING in the unknowable and feeling COMFORTABLE enough to wade into and rest in I dont know the answer here, but Im not going to fall back on prototype thinking that isnt relevant or useful. What we know is based on only a modest level of understanding and this coming from a medical doctor and scientist! Said another way: We dont know all we think we know! IF as investors we can embrace this humility, we are much more OPEN to that second part of his statement: you are instanteously ready to challenge what you know the minute you see anything that suggests it might not be right. In other words, one of the effects of letting the first statement sink in my thesis is NOT reality, and my understanding is modest anyway, and I WILL ALWAYS HAVE TRACKING ERROR is that there is much more openness, and much less defensiveness, to fully exploring, playing with, and seeing what might be OFF about your diagnosis. Instead of avoiding counter-signals, you will see them immediately AND be able to act instead of sit and scowl in defensiveness of your thesis. Pips Add: A YELLOW FLAG for me is when I go through the portfolio and get to company XYZ and I think Alls fine there No need to spend time on itNext.
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Now I think Whoops! Go back and THINK about that company!

BIAS #5: SEARCH SATISFACTION


What is Search Satisfaction?
Search Satisfaction is a natural cognitive tendency to stop searching, and therefore stop thinking, when one makes a major finding.

Whats an example?
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Many analysts work and work to develop enough conviction to get a company into the portfolio, and once the company is in and the adrenaline rush is over, there is a completeness to the work that can be completely misleading, an experience of: Ive done my work; I have high conviction in my thesis and, the implicit problem where Search Satisfaction sneaks in: I know what there is to know.

THE PROBLEM SEARCH SATISFACTION PRESENTS:

OVER-CONFIDENCE MIS-MATCH BETWEEN PORTFOLIO MANAGER AND ANALYST NEEDS

What tactics might help offset Search Satisfaction?


#1: WHERE THE THESIS WILL BE WRONG
We generate a pre-determined game plan well before taking a position that includes the following: -A stated business thesis -3-5 Statements suggesting where we think the thesis will be WRONG after the fact -3-5 Burning Questions core to affecting our conviction in the thesis -Relevant operating model metrics -A 1 year share price chart One of the most effective tools within it is the section of 3-5 statements that detail our thinking on where we think we are most likely to be WRONG. Highlighting this section has a number of benefits: 1) It reminds us of our own fallibility we are going to be wrong some of the time! Instead of ignoring that or denying it, we can work with it and work to reduce its probability of occuring. Part of having a thesis is recognizing it is only our best guess. I like Dr. Locks quote from How Doctors Think: Even though my reasoning is tight, Im still making it up.

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And this from a doctor who has a science to refer to. Now imagine how much of our thesis have elements of making it up in it! 2) We are reminded that there is not ONE answer to where the thesis will be wrong. 3) We are prompted to keep creatively thinking about HOW our thesis will be wrong. For me, this type of thinking is inspired by the book we read as a group, The Opposable Mind, by Roger Martin. Heres one example: Mastery without originality becomes rote. The master who never tries to think in novel ways keeps seeing the same points of salience, the same causal relationships, and the same problem architecture. Such mastery will produce the same kind of resolution every time, even if the context demands something different. Mastery without originality becomes a cul-de-sac. Roger Martin

#2: PIVOTAL QUESTIONS: A CONSTANT LINK BETWEEN THE PORTFOLIO MANAGER AND THE ANALYST
We have a newer tactic in our process we call pivotal questions. The idea is to identify the 1-2 Pivotal Questions that, depending on the answers we uncover, would dramatically change our position size. A Pivotal Question asks: What information or insights WOULD lead us to tripling the current position size? What information or insight would have us cut the position size in half? Pivotal Questions help tie in the immediacy of the portfolio managers job with the analyst that may be quietly falling into a state of Search Satisfaction, pleased that he did his job by having a company represented in the portfolio but unattached to the urgency of constantly assessing levels of conviction in each thesis and each position size in the portfolio. By using the questions that tie into **conviction** in the thesis **vs. other companies in the portfolio** there is a possible awakening to the importance of constantly assessing what FURTHER question would have our conviction increase or decrease significantly? Potentially the process of Pivotal Questions might lead to a more AWAKE experience in relation to each company/investment ALL the time.

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Fresh eyes is simply rotating in a different analyst -- not to take over covering the company -- but to do one quarterly thesis assessment to provide a different perspective. I love this tactic because it highlights that we all have different strengths on our team and may see things differently. In an exercise like this, we might be able to get some benefit from having another mind thinking through the company thesis for a few hours. Pips Add: Importantly, fresh eyes is dependent on the quality of your team. If your team is really a collection of individual egos the fresh eyes will devalue into a political hairball as opposed to a refreshing compliment.

#4: COMPETITION FOR CAPITAL


The competition for capital is the idea that a portfolio is a Darwinian exercise: there is a survival of the fittest among the different companies in the portfolio as well as candidates to come into the portfolio. There is no completion! ALL that inclusion in the portfolio means is that FOR NOW this company won the competition. It does NOT mean we now KNOW everything! There is no ability to rest and be satisfied if you believe in this perspective. This comes back to the link between the portfolio manager and the analyst where there may be a mismatch. The portfolio manager may LIVE this experience of competition for capital every waking moment, while the analyst considers his work done. Pip designed the integrated portfolio decision engine with the aim to link the work of the analyst and his needs as portfolio manager much better just ping us if youd like to read his CIO Investment Diary on it.

BIAS #6: COMMISSION BIAS


What is commision bias?
A tendency toward action rather than inaction.

Whats an example?
Unnecessary Trading:
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If I want to do something to improve portfolio performance, I may trade more without really having conviction in the trading while generating unnecessary transaction costs and wasting time. Moreover, sometimes the thought process put into making a trade fools us into thinking that a question about our thinking on the **investment** has been handled, when actually, the question in terms of the investment is still sitting there all Ive done is make a trade! At worst the nervous energy is put to poor use and a habit develops of one problem leading to an illthought reaction ad infinitum! Ugh! Diving Into a Research Black Hole: In an effort to act and to solve I may generate more and more reasons why I need to spend more time on XYZ Company research report. I may fall into endless hours of digging up facts, going to meetings, listening to conference calls, fooling myself into thinking I am doing research, when actually I am avoiding thinking through what is REALLY the important question to ask that could have my position size triple or take the position out of the portfolio. Without spending my time addressing those pivotal questions, I may be merely treading water.

THE PROBLEM COMMISSION BIAS PRESENTS:

WASTED TIME UNNECESSARY, COSTLY TRANSACTIONS

What tactics might help offset Commission Bias?


#1: No investment positions in IPOs for the first 6-9 months.
I put this tactic first because it is the most clear cut: no participation in IPOs helps us consider that there is no reason we HAVE to have an opinion on a company JUST BECAUSE it is coming to market. That is a supplier-centric view dictated by bankers, and as investors, we consider our calories more useful after a few quarters have gone by. We might examine a company that is a new IPO but we dont participate. The IPO process leads to biased information divulgence by conflicted parties painting a story. It is a period filled with emotions and undue attention for something now. A horrible environment for clear decision making. We take a view that there are plenty of fish in the sea and IF this is interesting now it will also likely be interesting in nine months.

#2: PICK TWO DAYS OF THE WEEK TO NOT PUT IN TRADES


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We have a guideline that we dont trade on Mondays and Fridays. This helps put trading in its place trading is a tool for our portfolio management which has a ~3 year time horizon. This may not be practical for other strategies, but we might want to consider an even wider rnage of trading moratorium days throughout the year.

#3: REMOVE TICKER SCREENS FROM WORKSPACE


(or at least turn them off for the hours when I really want to do some investment thinking!) IF I want to drive up my adrenaline to take action, all I have to do is watch a flickering screen all day. The movements of ONE DAY of trading could have you incented to take unwanted actions of all sorts. As we mentioned in the first Biases Waypoints it may be useful to observe whats in your air what about your environment incents you toward useless action? That screen may be one of them Pips Add: I havent had a ticker screen for 7 years and I dont miss it a bit. Initially eliminating the ticker screen is like a lifelong New Yorker contemplating moving somewhere else. They might wonder if it is actually possible to exist outside their perception of the center of the universe. It actually IS possible! And, I can exist without tickers flashing at me all day! Pips Story: Sitting at lunch in 1994 two older colleagues Mike Sassi and Dallas Corser reflected on the days of a couple years earlier when they had to make a special trip across the office to check a stock price on the only quotron in the office! They agreed that they were better investors then! But, no one sitting around the lunch table DID anything with that INSIGHT! Instead we rushed back to our desks to check how our personal list of tickers had acted in the period of 30 minutes away!

#3: EVALUATE HOW COMPENSATION IMPACTS UNNECESSARY ACTION


Pip decided to spread out bonus payments throughout the year instead of having one lump sum at the end of the year. I noticed a big difference in how this affected me that was distinct from my previous jobs on teams and in firms that hugely emphasized the end of the year bonus: I used to be distracted by what my bonus might be, and I can say with pretty high conviction that I think the rest of the team was too! This would result in all sorts of potentially nervous energy and odd behavior, none of it very productive, insightful or in the spirit of building a business for the long term. When the number is diluted over periodic payments, its influence diminsihes, and there is the added benefit of providing more opportunities for conversation and feedback that may only come up every 12 months otherwise!
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#4: IDENTIFY UNNECESSARY ACTION CREATE TIME DIVIDENDS


One of the benefits of identifying commission bias of all sorts (not just trading), is that it will result in TIME DIVIDENDS! So, if I can identify some actions that I no longer believe to be helping me grow into a better and better investor, and then I can STOP those actions, I should have availability to INTENTIONALLY CHOOSE NEW INPUTS that WILL help me grow! Some of the activities we have stopped or limited are : daily trades, listening to earnings calls, blindly accepting meetings with management teams, useless/mindless/insight-less financial modeling, going to conferences in which managements control a 20 minute power point presentation and are rung through 30 min 1:1s with pre-prepared answers, going to analyst days, listening to analyst days, reading the majority of broker research, particularly on earnings. The list of activities we have eliminated that do not support our process is enormous. As a result, we have huge time dividends, and have deployed our time to activities we think are much more useful toward generating insight.

#5: TIME CONSTRAINTS ON INVESTMENT WORK


We have a eight round process in which we identify EXACTLY how much time the analysts are supposed to spend on each level of work. Ill highlight two major purposes of this tactic: -The analyst is limited from going down that black hole. This is *especially* valuable for junior analysts who may have a fear of not answering every question or not covering all the bases. -Pip, who engages as each round of work is completed, has a framework for how were improving what I could do in four hours five years ago is VERY limited compared to what I can do now. He can help us see where we may be wasting time, and we are held accountable if we are continually going over time. Quickly we become discriminating about what is relevant and what is either noise or trivia.

#6: RETREAT FROM ACTION AT LEAST ONCE A YEAR


This year at the Sundance gathering we experienced 90 minutes of solitude. Yes, solitude. A group of 30+ investors and industry folks all put down our notebooks and smart phones and sat, went for a walk in the woods or otherwise experienced solitude. It was a further step toward creating more and more space at the Sundance Retreat that would facilitate an ability for all of us to step back and SEE more CLEARLY how we are, what we think and how we know what we know. From there, we have a MUCH stronger chance at identifying actions that we consider embedded in our process or crucial to our daily lives that are really just wastes of time. I think that is really what this work on biases is about for us investors, aiming to grow and expand as investors, but also to be continually assessing where we are simply wasting time, whether it is by falling into herd mentality thinking that offers nothing for our clients, or limiting our thinking by not allowing
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ourselves to identify the unknowable burning question, or by oversimplifying the incredibly complex questions we are faced with every day to the point where our shortcut question leads us down the wrong path. The best thing about being an investor is that there IS no prototype, there IS the opportunity to continually expand and grow and steep ourselves in complexity, patiently thinking through each piece of the puzzle until suddenly the puzzle starts to fit together and we think maybe just maybe we are closer and closer to reducing that tracking error between our thesis and reality which would lead to ever better trendline results for our clients. Maybe, as we work to be aware of the biases that are always going to be with us, we are seeing clearer and clearer. And the alternative is staying in the same rut as the majority of investors and likely, wasting time on processes that may actually facilitate us falling into common biases. The joy in exploring biases is my hope that it helps each of us grow instead of unwittingly resting in mediocrity. As Mary Oliver said, Tell me, what is it you plan to do with your one wild and precious life? brynne

brynne

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NODE #1 SOCIETAL SHIFTS

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Here is a very brief snapshot of each of our NODE #0s and NODE #1s monumental societal shifts. Please feel free to ping us for the more detailed write ups.

NODE #0:
#1) HUMAN POPULATION GROWTH/CHANGE: When human population growth rate is witnessed across a generation, the unintended consequences are extraordinary and trigger an infinite number of by products that induce dramatic societal changes. We see these unintended consequences and by-products as the root factor behind many global issues well beyond just clean/green tech. #2) DIGITAL DEMOGRAPHIC REVOLUTION: Society as a whole will adopt new technologies at an accelerating rate as Digital Natives and Digital Immigrants grow as a percent of the overall population, and have a greater influence on social and business norms. Digital Natives have grown up with technology (they were born into a PC and Internet eras), and Digital Immigrants are older but are comfortable using technology to solve a crisis. #3) GLOBALIZATION: Technology has supported the so-called shrinking of the planet; geography and nationality have become less of a barrier. Key words that we associate with globalization are *effective*, *expanded sourcing pool* and *expanded market opportunity*. For example, those who are using or facilitating the expanded global sourcing pool will benefit while those who do not will face a diminishing competitive advantage.

NODE #1s:
#4) THE DIGITAL FERRYMAN: The concept of the Digital Ferryman has its roots in the Change Function and in the premise that Analogists and Digital Immigrants have higher total perceived pains of adoption (TPPAs) when it comes to technology than Digital Natives do. A Digital Ferryman is a product/service or company that takes the uncomfortable Analogist by the hand and helps him migrate to the Digital World. #5) HYPER PERSONALIZATION: People are getting more accustomed to having their lives more and more exactly like they would like it and are demanding such. *I want what I want when I want it and where I want it and how I want it*. We expect individuals to accelerate hyper personalization as it becomes clearer that they have the ability to do so and that doing so is socially acceptable. #6) NAKED WITHOUT DATA: We believe: i) society is in an infant stage in its relationship with data; and ii) that the impact of data usage is far far greater and wider than is understood. In many instances people feel Naked Without Data. The issues of data presentation, regulation, quality, measurement, analysis, search, mobility, video, data mining, health careetc will all undergo further development, creating numerous business opportunities. #7) UNCENTRALIZATION: We think that the further development of technology combined with the effects of the Digital Demographic Revolution will lead to a far greater transparency and *truth* that will demand centralized organizations to use more and more energy to maintain their centralized status to fight the laws of entropy. Uncentralization, in turn, leads to wider choice for people who understand their options (and how to use technology to access those options).
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#8) DYNAMIC MOBILITY: This refers to much more than cell phones and smart phones. The core idea is being able to do things from anywhere, anytime. Mobility is a subset of freedom, and people have shown that they will go to great lengths to have freedom. We expect much of the population will enjoy more and more dynamic mobility at an accelerating pace during the next several years. #9) ADDICTED TO COMMUNICATION: People are addicted to the experience of being on common ground or *connected* to one another. Communication is about action taken towards the experience of oneness and shares the root with community. It is much wider than just talking. We have seen an incredible expansion in the tools for communication (email, mobile phones, YouTube, SMS, blogging, FaceBook, Twitter, Second Life, etc.), and we expect to see many many more. #10) ADDICTED TO VIDEO/IMAGES: We see humans as extraordinarily affected by videos and images. We believe that the Digital Demographic Revolution will accelerate this circumstance and opportunity as Digital Natives are training the older impressionable generation to attach even greater meaning to video and image. This goes beyond screens and YouTube and extends to facelifts (addicted to our self-image). #11) THE END OF THE ADVERTISING WORLD AS WE KNOW IT: *Advertising* is not dead, but it is changing. Advertising has been about manipulation and humans dont like being manipulated; they develop immunity against manipulation, so new forms of manipulation replace old ones that no longer work. In this context, traditional advertising agencies are scrambling to acquire new expertise while pretending they understand the new world when they largely do not. #12) THE FREE WORLD: This concept refers to a world in which people expect that many of the products/services that they previously paid for are now free (gratis); for example, music, movies, articles, news services, data services, travel advice, telephone calls, the internet itself, electrical charging at airports, etc. The advent of the internet has accelerated this trend. #13) THE FASTER WORLD: Humans place a value on speed and have for a long time. The Digital Demographic Revolution accelerates the desire for FASTER; technology facilitates it as well. We expect products and services that enable the Faster World will provide good business opportunities as will products and services that serve as antidotes to the Faster World (such as day spas). #14) MEANING OF LIFE IS TO BE ENTERTAINED: We observe that entertainments value in society today is so large that if an alien came to the developed economies of the planet, they might well mistake the purpose of our planet was to be *entertained*. So, as investors we consider those businesses that will benefit from effectively injecting entertainment into our lives. #15) MEANING OF LIFE IS TO CONSUME AS MUCH AS POSSIBLE: We observe that humans in many societies seem to place an ever growing emphasis on the ability to consume as a gauge of their underlying *value* as a person. In this context, providing others with the *experience* of consuming appears to be a good thing to do. #16) COMFORT WITH *CHANGE*: Humans are in the process of truly accepting that the world is nothing but dynamic. We expect the users relationship with change to grow from passive/victimized toward active/empowered. #17) THINKING: LINEARLY HOLISTICALLY: We see some signs that individuals and organizations are more and more accepting of the idea that everything is tied together in ways that are very hard to understand. We suspect that a larger number of individuals and organizations will accept that they must think and act holistically in order to be more effective. Technologies will be seen as facilitators of effective holistic solutions and lives.
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#18) DO MORE WITH LESS: The old way of thinking about Enterprise spending was: technology is critical to competing in the future. IT will save you. The new way of thinking is: Do More With Less. We see no signs of a reversion to the prior mantra and we do not expect as such. Public companies have exhibited tendencies of being addicted to margins and outsourcing is one form of pursuing that addiction. There is a huge and on going opportunity in understanding the Do More with Less mantra and then tailoring and selling services and products successfully into such an environment. #19) OUTSOURCE IT: Although the concept is hardly new in its effect, the word outsourcing has become prominent in the last 2 decades. Today, peer pressure to outsource is immense; keeping fixed costs down is at a premium; shrinking down to ones core competency is growing. Those abstracts are manifesting themselves in a still rapidly growing set of business opportunities. #20) AGE OF INFORMATION AGE OF INTEGRATION: The Age of Information ended once everyone had access to nearly as much information as they could possibly want and were being bombarded with tremendous amounts of information they didnt want at all! Today, there is a tremendous opportunity to help people cope with and then effectively use all the tools and data that they have easy access to hence the Age of Integration. #21) COMPLEX TO SIMPLE: The idea of simplicity in product design, service, promotion and education will all become growingly important elements in determining product and service winners over time. This is a change especially in the tech market where it seems that over the past 50 years, many new applications were introduced that added more complexity to an already complex ecosystem. #22) ITERATIVE OPEN DEVELOPMENT: Culturally we are very early on in what might be a 20 year adoption of these two idea principles that apply at a minimum to design of products and operation of organizations. Iterative development is often associated with rapid prototyping, time to market and more laser-like matching to user requirements in product design. Open development is a related idea that relates to both business models and product design. #23) GRANULARITY: Technologys on-going ability to supply far more capability, far less expensively and to do so in many new ways and variants. The capability to supply in a fashion that is nimble, cheap, specific, adaptable, effective, imaginative, personal. This, frankly, has been going on progressively for thousands of years: ingenuity creates new abilities to supply in ever more dramatic fashions until they are merely expected. Example: the Toys R Us pop up stores at Christmas; a 25k library of songs on a chip that fits inside a matchbox. #24) ROUTING AROUND INSTITUTIONS: A force that combines Granularity a supply-oriented force and Hyper-personalization a demand-oriented force. End users are increasingly demanding exactly what they want, when they want it. And their acumen about how to get it by routing around the incumbent institution is also rising. Granularity, meanwhile, is providing end users with new ways to get the service they want such that the old service provider (i.e. the institution) may be dis-intermediated. Example: newspapers routed around by the Internet, local healthcare system routed around by medical travel.

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