Why Investors Need To Think More Like Sherlock Holmes

Why Investors Need To Think More Like Sherlock Holmes

Why Investors Need To Think More Like Sherlock Holmes by John Szramiak was originally published on Vintage Value Investing

Last night I was looking for a book that I could read before bed that wouldn’t keep my up all night thinking. I was specifically looking for a nice, easy-to-read fiction book that would help offset the non-fiction/investing/business-related books I normally tend to read.

So I picked up The Adventures of Sherlock Holmes by Sir Arthur Conan Doyle off my bookshelf.

The Odey Special Situations Fund Slides In 2022 But Is Primed For Growth

What is disadvantage of growth fundThe Odey Special Situations Fund declined - 0.3% in November, according to a copy of its monthly investor update, which ValueWalk has been able to review. Following this performance, the $94 million fund has returned - 12.4% year-to-date. It remains 2.16% ahead of its benchmark, the MSCI World Index, for the year. In the November Read More

Sherlock Holmes

I don’t know if this is a coincidence, or if my brain just subconsciously works to relate everything I read back to investing and how to make smart decisions, but the very first page of the book opened with a Preface giving a description of Sherlock Holmes – a description that could just as well have described Ben Graham, Warren Buffett, Charlie Munger, or any of the other great value investors.

So of course the book had the opposite effect of what I was looking for and I stayed up another hour reading and thinking about how Sherlock Holmes could’ve been a great value investor if he had wanted to be. Anyways…

I pulled out some passages about Sherlock Holmes from what I read last night that I really think fit the mental attitude that value investors should have.

Invest Based on Facts and Arithmetic, Not on Guesswork and Optimism

“To trace the evolution of the character and his career one must first understand the character of Arthur Conan Doyle. When he was a young doctor, Doyle was fascinated by empirical facts and their dependability; it was the sense of the dependability of physical evidence found in his stories that helped seduce their first English audience.”

“…Doyle intended for Holmes to be terse, methodical, and dependent upon reason and logic…”

Back in the 1930’s, Benjamin Graham was essentially the first investor to say that investing should be based on facts and calculations using solid numbers, rather than on speculation about the future prospects of a company or the future movements of its stock price. According to Ben Graham, “An investor is neither right or wrong because others agree or disagree with him; he is right because his facts and analysis are right.”

The Importance of Keeping Things Simple in a Complex World

“[Sherlock Holmes] had been modeled on one of Doyle’s medical professors, Dr. Joseph Bell. Doyle greatly admired his tutor for his great intelligence and for his incredible sense of logic. It would seem that his teacher was gifted in explaining difficult problems so clearly that they seemed ‘elementary.’ This goes a long way in explaining the teacher-student relationship between Sherlock and his almost equally famous companion Dr. John Watson.”

This reminds me of Warren Buffett, who is so good at breaking down complex financial and investing topics and giving simple explanations for them.

In “A Scandal in Bohemia,” Sherlock hasn’t seen Watson for several months. But when Watson comes to visit him, Sherlock is able to deduce that Watson had started practicing medicine again, that he had gotten caught in the rain the previous Thursday, that his housemaid is clumsy, and that he has gained 7 pounds. He then explains to Watson how he reached those conclusions:

“I could not help laughing at the ease with which you give your reasons,’ I remarked, ‘the thing always appears to me to be so ridiculously simple that I could easily do it myself, though at each successive instance of your reasoning I am baffled until you explain your process. And yet I believe that my eyes are as good as yours.’

‘Quite so,’ he answered… ‘You see, but you do not observe. The distinction is clear.’

Charlie Munger says that investing should be more simple than it is complex – although it might actually be harder mentally to keep things simple.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

An Investor’s Worst Enemy is Himself

“In Holmes’ encounter with Miss Mary Sutherland, he demonstrates the clarity that reason can lend his thinking. He does not let emotions, assumptions, or judgments stand between him and a mystery. He simply examines what is before him, and that is all he needs to find his answer. For the reader who identifies with Dr. Watson, Holmes represents stability. He is as reliable as the facts upon which he depends. He is unflappable, and his work is pure science.

Perhaps the most fascinating thing about Holmes though, is not his stringent logic but his lack of other, more human characteristics. As one reads this book, the notion that Sherlock Holmes is like a computer is never far from consciousness.”

A little later in “A Scandal in Bohemia,” Sherlock has received a mysterious letter and shows it to Watson:

‘This is indeed a mystery,’ I remarked. ‘What do you imagine that it means?’

I have no data yet. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.

Theorizing before you have data, and then twisting facts to suit theories is confirmation bias. I’ve talked about heuristics and biases several times before (see The Ultimate List of Cognitive biases, 6 Cognitive Biases Investors Should Know, and 9 Cognitive Biases You Need to Know to Master Your Money) and how they can influence your decision making when investing and in business (read Thinking, Fast and Slow, The Undoing Project, Influence, and Methods of Persuasion for more on this topic).

Become a Learning Machine; Go to Bed Smarter Than When You Woke Up

“Sir Arthur Conan Doyle’s famous creation, the Sherlock Holmes mysteries, is indeed the product of a meticulous mind. Doyle’s plots are a matter of clear cause and effect… Holmes never falters because he relies on being able to learn everything he needs to know. No knowledge is barred from him; rather, one need only discover which approach to take to ferret it out.

Warren Buffett and Charlie Munger are learning machines. See The 10 Best Charlie Munger Quotes, The Secret behind Charlie Munger’s Success, and Warren Buffett’s and Charlie Munger’s Top 7 Tips for the Class of 2016.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Sherlock Holmes: The Complete Novels and Stories by Sir Arthur Conan Doyle

Since his first appearance in Beeton’s Christmas Annual in 1887, Sir Arthur Conan Doyle’s Sherlock Holmes has been one of the most beloved fictional characters ever created. Now, in two paperback volumes, Bantam presents all fifty-six short stories and four novels featuring Conan Doyle’s classic hero–a truly complete collection of Sherlock Holmes’s adventures in crime!

Sherlock (TV Show) starring Benedict Cumberbatch and Martin Freeman

In this contemporary version of Sir Arthur Conan Doyle’s detective stories, Dr. John Watson is a war vet just home from Afghanistan. He meets the brilliant but eccentric Holmes when the latter, who serves as a consultant to Scotland Yard, advertises for a flatmate. Almost as soon as Watson moves into the Baker Street flat, they are embroiled in mysteries, and Sherlock’s nemesis, Moriarty, appears to have a hand in the crimes.

Sherlock Holmes (2009 Movie) starring Robert Downey Jr. and Jude Law

Revealing fighting skills as lethal as his legendary intellect, Holmes will battle as never before to bring down a new nemesis and unravel a deadly plot that could destroy the country.

Article by Vintage Value Investing

Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
Previous article Understanding And Preparing For Recessions – Interactions Between Sectors
Next article Step-By-Step Guide To Install Kodi 17 On iPhone Or iPad

No posts to display