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Notes and musings from a Value investor

Organograms, hedgehogs and Benjamin Franklin

5 December 2019
Author: Alastair MundyHead of Value

While completing their due diligence, clients sometimes request a team organogram so they can better understand how we operate. This generates mixed emotions in me, as from a presentation viewpoint, I have ‘organogram envy’, as I imagine other teams around the city showing beautifully designed charts, clearly explaining each individual’s responsibilities. The Investec Value team’s equivalent shows something more akin to organised anarchy; a team of individuals with no fixed responsibilities who are encouraged to wander across markets, sectors and companies as they see fit. I am probably overestimating clients’ desires for style over substance, but it was still good to stumble across Range, How Generalists Triumph in a Specialized World by David Epstein.

Range is yet another pop psychology book and I must admit I am just about replete with this genre. There are only so many times one can read about firemen using their instincts in a burning building to realise the fire is different from historical experience, how chess players can repeat positions on a board with ease from memory only if the positions are legal, how kids who delay eating a marshmallow grow up to be jolly clever, well-balanced people and how the two space shuttle disasters might have been avoided if warning signs had been acted upon. Still, all has not been wasted. A book implying that deep industry experience is not necessarily the optimal way to build a team is, if nothing else, a great exercise in confirmation bias for a team of generalists.

Epstein’s work can perhaps be summarised by his belief that it is important to appreciate what environment one is operating in. In ‘kind’ environments, practitioners find patterns, benefit from deliberate practice and receive accurate feedback – chess, the playing of classical music and sport in general are exemplars of this. However, many environments are ‘wicked’ – the rules are incomplete, there is delayed or inaccurate feedback and there are non-repetitive patterns and, Epstein surmises, narrow specialisation under these conditions can backfire horribly.

This is not a great time in history for ‘experts’ and Epstein adds to their woes by highlighting ‘a recent study found that cardiac patients were actually less likely to die if they were admitted during a national cardiology meeting, when thousands of cardiologists were away; the researchers suggested it could be because common treatments of dubious effect were less likely to be performed.’ To a man with a hammer…

And with expertise comes a great deal of confidence – a subject which morphs nicely into the well-known work of Philip Tetlock and his study of forecasters. Tetlock identified two groups; hedgehogs with deep and narrow knowledge who “performed especially poorly on long-term predictions within their domain of expertise” (but who had great narratives, were fantastic for TV and were particularly good at ‘forecasting the past’) and foxes who “draw from an eclectic array of tradition and accept ambiguity and contradiction”.

David Robson really has it in for our dear old hedgehogs. In The Intelligence Trap, Why Smart People do Stupid Things and How to Make Wiser Decisions he highlights everything that is wrong with experts. He claims they may not be able to think counter-factually, suffer from dysrationalia (a mismatch between intelligence and rationality), motivated reasoning (only thinking deeply when confident the conclusions will suit the predetermined goal) and bias blind spots (seeing others’ flaws but not their own), have too much confidence because of earned dogmatism (closed mindedness) and employ entrenched automatic behaviours (having rigid and fixed views). That’s quite a crime sheet.

Bringing this back to our organogram, we highlight that members of our team are not experts in any particular field and come to a new company with a rather empowering mix of ignorance, freshness and curiosity. Who knows if that’s the optimum approach, but at least we have friends in high places. Benjamin Franklin, one of the founding fathers of the United States who had much bigger problems to wrestle with than whether the fifth M&S recovery story will finish any differently to the previous four opined that, “I find a frank acknowledgement of one’s ignorance is not only the easiest way to get rid of a difficulty, but the likeliest way to obtain information”.

The wind is clearly blowing in the faces of hedgehogs. Rather than enjoying their discomfort it may well be a good time to put several biases aside and ask if they are being unfairly treated. It’s even a book I might come out of Pop Psychology retirement to read.

Alastair Mundy
Alastair Mundy Head of Value

Important information
This communication is provided for general information only should not be construed as advice.
All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Investec Asset Management.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
All rights reserved. Issued by Investec Asset Management, issued December 2019.

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