निंदक नियरे राखीये, आंगन कुटी छवाय
बिन पानी साबुन बिना, निरमल करे सुभाये
My translation: "Kabir asks you to keep your critics and detractors close; by building a cottage for them in your courtyard because they cleanse your habits without soap or water."
I use Google Reader to keep track of investment related articles published around the globe. Among the most prolific subscriptions are GuruFocus, Seeking Alpha editor’s picks, Motley Fool and Wall Street Journal.
Between these four, I have to get through more than 100 articles each day. This is not an easy task, given that I also hold a full-time job and like to read a few books in parallel to aid my intellectual development. Missing a day or two exacerbates the problem.
Most articles put forth a positive case for a particular stock. A very few talk about the negative aspects of a stock. The positive picks outweighs the negative ones by a significant margin. I find myself increasingly skipping the positive ones and zeroing on the negative ones. By only concentrating on the articles that are critical of a company, I have significantly reduced my workload.
Sir Karl Popper was an Austro-British philosopher who taught at London School of Economics. He is generally regarded as one of the greatest philosophers of science of the 20th century.
Science, in broad terms, makes an attempt to explain the universe. The scientists observe a phenomenon and proffer an explanation by proposing a hypothesis or a theory. A theory is falsifiable if one can imagine an experiment in which it can be verified as false. A falsifiable theory is not false, only “falsify”-able. For example, “all swans are white” is a falsifiable hypothesis. If we observe a non-white swan then the hypothesis is false.
Being falsifiable is considered a positive for a theory because it can then be tested by experiments.
Falsifiability has an asymmetry associated with it. Day in and day out we see swans that are white. Our confidence in the "truthiness" of “all swans are white” increases. This increase in the confidence is more or less linear. It gradually increases and reaffirmed whenever we see a new white swan.
But consider the effect on the confidence after an encounter with a single black swan. It goes to zero. A single event of seeing a black swan has more information than seeing thousands of white swans!
An ardent critic is a valuable resource. A single chink is all it takes for an armor to be useless. Likewise, for an investment to be successful a lot of things need to go according to the plan. On the other hand, a single misstep can prove to be quite costly for the shareholders.
So I propose that when you are considering your next new investment idea, don’t look for why it is so great. Look for why it is bad. Criticize yourself!
Find out why you should not buy this particular company instead.