Rules For A Constructive Stock Debate

“The aim of argument, or of discussion, should not be victory, but progress” Joseph Joubert

As a fund manager I would go through the process of an analyst pitching an idea in the morning meeting almost every week. Usually the analyst would distribute their investment note the night before. Then in the morning meeting, after the analyst had pitched the idea, the fund managers would ask questions and test various aspects of the investment case. People who were still interested would take up more detailed discussions with the analyst after. It wasn’t a bad process. There was a good amount of challenge, but the group came to a consensus decision relatively quickly and after that the discussion would die down.

One of the things I love about online investment platforms is that the debate is comprised of a much larger and more diverse set of individuals. This leads to a wider range of opinions and generates the kind of vigorous debate you don’t always get offline. What’s more, the debate continues long after the initial ‘pitch’. And the group never needs to come to consensus – there will always be someone taking the opposite point of view.

Smart institutional investors are increasingly waking up to the value of online platforms as a source of ideas and debate. As a larger set of people examine the same information, chances are that they are able to test the thesis much more thoroughly. I can think of no better example of crowdsourcing in action (see my previous post here for a more thorough discussion)

Charlie Munger has spoken frequently about the value in constantly challenging your objectivity. Publishing your idea on an online platform is one excellent way to do this

“The mental habit of thinking backward forces objectivity. One of the ways you think a thing through backward is you take your initial assumption and you say, let’s try to disprove it”

The downside of online platforms however is that the debate can deteriorate into mudslinging. There’s a thin line between robust debate and trolling. Tensions get high and participants withdraw from rational debate in order to defend their existing long or short position. This is a shame because we could extract a so much value from the community by listening carefully and responding with logical arguments. We built StockViews as an analytical platform with the aim of cutting back on much of this noise. Here are the rules I would encourage people to follow when entering into any kind of discussion on the subject of stocks:

    1. Read what you comment on

Too often in the online world, people jump into the fray without reading or trying to understand the argument presented. This doesn’t mean that you have to agree with it, but it’s hard to present a counterargument if you haven’t properly read the argument in the first place.

     2. Don’t enter into the debate with pre-conceptions

This is one of the key reasons why stock debate often creates more heat than light. People enter into a debate with a fixed view – usually based on their whether they are themselves long or short the stock. Their aim then becomes to defend their pre-existing view, rather than progressing their knowledge. Avoid this mistake and go into the debate with an open mind.

     3. Focus on the process

Focus less on the outcome (whether the author is buy or sell) and instead focus on the process. Has the analyst covered all aspects of the investment case? Have they considered all the risks and opportunities? How thorough have they been in valuation of the company?

    4. Test assumptions

The thing that should be getting the most attention, often gets the least. The biggest mistakes I’ve come across are when an analyst has made (and the fund manager has accepted) unrealistic assumptions, usually involving revenue growth. Question these assumptions, and then question them again. Particularly if they look heroic.

     5. Look for evidence

A good analyst will base their research as much as possible on verifiable facts. They will minimize the extent to which they rely on assumptions. So always look for evidence. If the evidence isn’t clear, then ask for it.

    6. Look for significant errors

Some people like to point score by pointing out minor errors in the thesis. Unless these errors materially alter the investment case, there is little point in dwelling on them. Even the best analysts will make significant errors in their work from time to time. In these cases it is important to (politely) identify these errors and allow the analyst the chance to review their opinion in light of them.