I may be wrong in regard to any or all of them; but holding it a sound maxim, that it is better to be only sometimes right, than at all times wrong, so soon as I discover my opinions to be erroneous, I shall be ready to renounce them.” – Abraham Lincoln, “Speeches and Writings: 1832-1858"
"I wonder where you got that idea from? I mean, the idea that it's feeble to change your mind once it's made up. That's a wrong idea, you know. Make up your mind about things, by all means – but if something happens to show that you are wrong, then it is feeble not to change your mind, Elizabeth. Only the strongest people have the pluck to change their minds and say so, if they see they have been wrong in their ideas.” – Enid Blyton, “The Naughtiest Girl in School”
In a recent article by Science of Hitting, he discusses the reasons for selling his position in Staples (SPLS, Financial). In essence, his investment was incorrect, and he decided his capital could be allocated more wisely. We applaud him for both his approach and ability to write about it in such a frank and honest manner.
One of the most difficult tasks to complete is to review your mistakes a short time after making them. As Philip Heymann said, “The wisest actions don’t confuse dealing with the danger and dealing with the anger.” At the Ninta Charitable Trust we think this quote defines the problem – one certainly gets angry after losing a great deal of investment dollars, but the danger lies in doing or learning nothing as a consequence of that mistake. At Nintai we've made too many mistakes to discuss in a single article. What I thought might be helpful is reviewing how we got to our process – everything from identifying the mistake to institutionalizing the learnings. All while trying not confuse the danger with the anger.
What is the mistake and what steps can be taken to solve the problem?
In this phase we look to define the scope and component parts of our mistake. We attempt to make sure we define both the mistake and the steps required to get there. Additionally, we break down the decision tree that got us to the solution and rework each of the decision points, Ultimately we want to know:
- Who were the decision makers?
- What were the time constraints in making the decision?
- What data were required to make the decision?
- What key assumptions were used in making the decision?
- What defines the major characteristics of the poor decision?
An example of this was our investment in Corporate Executive Board (formerly EXBD now CEB). After suffering from significant losses (explained in more detail here), we spent an enormous amount of time defining the problem that turned on purchasing the wrong stock at the wrong time and purchasing more on the way down. We defined the issues as a.) poor stock selection criteria, b.) flawed investment methodology and c.) inadequately thought out assumptions. From this came our first integrated internal review process with a substantial checklist to test our methodology.
What process and steps can be taken to evolve or change our current system to prevent this mistake from happening again?
It turns out the previous steps I listed above were only the beginning our learnings. Several months after reviewing the EXBD fiasco, we found ourselves facing a similar scenario with Thompson Creek Metals (TC, Financial). We first purchased the stock at roughly $3.50 per share in 2009 and sold it in 2011 for roughly $12.50 per share. What seemed like a relatively good investment was – in reality – getting off the Titanic in Ireland just before it continued on its maiden cruise through the ice fields of the North Atlantic. Looking back at the investment decision, we found we had made very similar mistakes to those made in the EXBD investment case. At this point, we felt we needed to re-evaluate our investment process and add another layer of thinking. The core focus on these questions centered on a.) what we can control in this process and b.) how we can prevent additional failures.
- What part of the investment review process do we control?
- What parts reflect complex systems? Where can we mitigate risk with these?
- What systems require human evaluation and technology valuation? Where do they blend?
- What systems can we build that provide multiple checks at certain key junctures?
As we looked at the process to date, we recognized one glaring error: how do we get these thoughts and learnings throughout the entire organization? In other words, how do we make risk management a core value from top to bottom in the organization?
- How do we institutionalize this learning across the organization?
- How can we incentivize individuals to employ both process and findings going forward?
- How do we measure the success of these new systems and findings and database?
- How do we continue to improve these systems to further reduce risk yet be flexible enough to adapt to new data/findings?
After following all of these processes and systems, I’d like to say that we are better investors at the Nintai Charitable Trust, and I think we are. But this is a constant journey of learning. I would like to think we are on a constant and perpetual journey to improve our thinking and decision-making.
Conclusions
Oscar Wilde once wrote that experience is the name we give our mistakes. At the Nintai Charitable Trust, experience masquerading as mistakes has been a constant companion on our journey to be better investors. We like to think our errors have been vital building blocks in improving our investment models. Looking back, Lincoln came out all right with his maxim thatit is better to be only sometimes right, than at all times wrong. As a long-term investor – armed with a learning mind and investment processes – you can't do any better yourself.
