To test if you are right, meet someone betting you are wrong
Investor Bill Ackman builds conviction by seeking out short sellers, and managers at Norway's sovereign wealth fund are trying to copy the habit.
In Good Company with Nicolai Tangen · Friday Wrap-Up: Inside Active Strategies and Learning from Bill AckmanDaniel Balthasar, the co-chief investment officer in Active Strategies at Norway's sovereign wealth fund, says there is one habit he wants to copy from Bill Ackman. Ackman is extremely good at testing his own case for owning a stock, and Balthasar says the fund needs to do better at that.
When Ackman is considering a new holding and wants to become more sure, Balthasar says, "he meets the biggest short seller." He hears out people who hold the opposite view, and he consumes news and information in a specific way, trying to find facts that undermine his case for buying.
The reason that is hard, Balthasar says, is human nature. People do not like to hear that they are wrong, and the brain makes it easy to avoid the message. He points to the late Daniel Kahneman's book, Thinking, Fast and Slow. The quick, automatic side of the mind answers on its own and does most of the work, while the slower side does the careful reasoning but has to be summoned on purpose, and it can be a little lazy.
That means getting people to switch on the slower, careful thinking. What Balthasar says they should do comes down to three things: find the counterarguments and challenge themselves, stay open with the objective of finding the truth and admit when they are wrong, and then systemize what they learn to de-bias future decisions.
For that last part, the fund is developing systems to help managers challenge themselves. It already has a system that analyzes all investment decisions to identify what each portfolio manager is good at, and what each is not good at, in order to improve the quality of future choices.
The place to start, in Balthasar's account, is simpler. Look for the counterargument, hear it fully, and be willing to admit that it is right.
Questions people ask
What is a short seller?
A short seller borrows shares and sells them, hoping to buy them back later at a lower price. If the price falls, the short seller profits, so short sellers have a strong incentive to look for problems that enthusiastic buyers might miss.
Does meeting a critic mean you should abandon your idea?
No. The point is to test your thinking before you commit more money or confidence. If the critic's case is weak, your conviction should grow. If it is strong, you can shrink the bet, wait, or walk away.
How do you systemize lessons from being wrong?
Write down what you expected, what actually happened, and what you missed. Over time, patterns appear, such as buying too early or holding losers too long. The fund has a system that reviews decisions to spot those patterns for each manager.