What You’ll Learn
- The importance of being decisive
- How checklists can fail
- How to improve your snap decisions
- My snap decision examples
Make fast, decisive and good decisions when picking and analyzing stocks.
Isn’t that what we all want?
Ian Cassel’s article on indecision really got me thinking about the role of decision making. I’ve also been coming across more articles and books on decision making and lo and behold, I see a copy of Blink: The Power of Thinking without Thinking on my shelf.
My wife is a Malcolm Gladwell fan and loves to buy books, instead of reading them…
If I call it gut reaction, you know what I’m talking about. It’s similar but not exact. By calling it a gut reaction, it hides the fact that its an area that can be improved.
You could call it an instinct or intuition, and you’re either born with it or not, but even instincts are learned and developed.
But gut reactions are really subconscious signals from the amount of data that you’ve accumulated throughout your life that comes out in different forms.
You’ll see how this all fits in because I’m going to show you specific examples that will help you with your decision making.
I’m sure you’ve experienced things where:
- You get an uncomfortable feeling just awhen you’re about to sign a big deal
- Your hands get sweaty during a conversation
- When you see a no-brainer deal, it’s like a light bulb literally lights up
- Or maybe your gut really does have a reaction
Are these natural tendencies? Yes, but it’s also a result of having picked up signals and clues that you haven’t realized.
I’m going to use the term “snap decision” because it’s the term used in Blink and I prefer it much more.
The Power of Snap Decisions and Processing
There are some things that we just cannot verbalize or explain.
Here’s an example.
Think of a person you love and try to verbalize what that person looks like.
I would never be able to figure out who you are talking about.
“Shoulder length hair, small roundish nose, big round eyes, egg shape face”
That’s my wife.
You’ll never find her in a crowd with that description, but in my mind, I have the power to easily create an image of her and pick out a scarf that will suit her, or imagine the expression on her face when she gets her favorite cup of coffee.
Being a value investor and too much of a fundamentalist, it’s too easy for me to ignore this part of how I think and process information.
There are too many times where I find myself forcing an explanation that really can’t be explained.
Or not selling a position when my gut is giving me signals, but because I’m unable to verbalize or explain it logically, I ignore it – and lose money.
Checklists Are NOT Fool Proof
To avoid mistakes and bad decisions, you’d think that checklists are the answer.
But it’s not.
I sound like a hypocrite because I’ve written a lot about checklists already. These 4 are the ones that get read the most on old school value.
- 15 points Phil Fisher checklist analysis
- my investment scorecard
- package of checklists to download
- my old flowchart checklist viewed over 27k times
I strongly advocate using checklists, just not 100 page versions or ones that require you to write an essay.
If a checklist takes you a whole day or more, you’re drowning yourself with information or you’re looking at the wrong things.
A checklist will not make you a better decision maker. A checklist is there to prevent you from blowing yourself up.
Blink starts with a simple story of a museum who bought an ancient statue after months of due diligence. They brought in geological experts to verify that the marble the statue was made from, came from the correct time period. Other scientists ran all sorts of tests to verify that it was in fact an original.
They did some crazy in-depth due diligence.
The museum finalized the deal and it was a proud moment.
Until one day, an expert in statues and art comes to check out what the news was all about.
In one glance, he was taken aback. He didn’t know what it was, but he felt it looked too “fresh” for something that is supposed to be centuries old.
He couldn’t put his finger on it.
Then another expert comes by, and for some reason, she feels “disgusted” and starts to analyze the fingertips of the statue.
Long story short, the statue was a fake.
Now, the question posed in the book is, how were these outside experts able to understand that the statue was a fake the minute they saw it?
Why and how did the scientists and the museum curator miss the signs, that now look so obvious in hindsight?
This brings it back to why I don’t like looooong checklists.
Checklists are good to narrow down a basket of stocks or to use as a last line of defense. It’s not a good idea to base your entire thesis on a checklist as it could easily box you in.
Focus on the Important Facts. Everything Else is Noise.
The people that realized the statue was fake didn’t have a 50 page lab test report to base their decision off.
They recognized just one important area (“fresh” and the finger nails) to tell them everything they needed to know about the status of the statue. Instead of being knee deep in documents approving the test results, these people were able to come to a fast and decisive snap decision.
The problem nowadays is that we are literally flooded with information and we think that more information and quick information is good.
Focusing on the right information is all that’s needed.
When Bill Ackman hosts a 4 hour call defending his position in Valeant Pharmaceuticals, which can be summarized in 5 points, there’s an issue.
He’s drowning himself in data and doing what all those scientists did with the statue. The more information you have must mean you know more. Right?
Well, the short seller Andrew Left is the perfect example of simply looking at the important facts (the fingernails) to smell something foul with Valeant.
The market is the verdict so far with Valeant down 67% YTD and -83% in one year.
Knowing what to ignore is just as important.
Focusing on the Important Things with Apple
My decision to continue holding Apple is still strong and my thesis and reasoning is simple.
With Apple, I don’t bother with trying to keep up with the trend of tech and what they are doing with motion detection for TV’s, cars, or the next generation iphone. I don’t care how many pixels the camera has or what size screen it will be.
What I see is a strong brand with a rabid fan base begging the company to take their cash anytime something new comes out.
The company milks profits and their free cash flow generation and balance sheet is out of this world.
The valuation is simple and my advantage is time. There are literally hundreds of things I ignore, but these simple facts are my fingernails.
If these things change, then the whole