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Robert Abbott
Robert Abbott
Articles (801)  | Author's Website |

Book of Value: Imitation, Analysis and Falsification

Test your investing hypothesis by trying to prove it false

March 19, 2020

“As opposed to gambling or speculation, investing requires that investors re-learn the art of looking, of honing in on important facts, and then cobbling together an array of clues into a well-informed thesis about each entry in their investment portfolio.”

Chapter ten of Anurag Sharma’s book, “Book of Value: The Fine Art of Investing Wisely,” carries the title of “The Art of Looking.” What the author is referring to with this title is the art of searching for stocks.

At the top of his list of "looking" methods is imitation; in other words, we don’t investigate on our own. Instead, we imitate what others are doing. Both amateurs and professionals tend to rely on this approach; amateurs do it because they don’t know what else to do.

Professionals, including money managers, imitate others because they need to generate returns every quarter. I would add there’s lots of evidence that money managers take this route because it lessens accountability. It’s easier to say they didn’t do any worse than the competition, or that they only did badly because everyone else bought those stocks.

Sharma observed that “a focus on the short term and an inclination to copy others go hand in hand with the facts that price are unpredictable in the near term and markets are incredibly noisy.” He added that imitation and speculation drive the markets.

Thoughtful investors must learn how to look for suitable companies, gather relevant and useful data, interpret that data, make judgments after interpretation and wait for results over the longer term. As part of that looking process, they should remain aware of confirmation bias, which is the tendency to favor information that supports their existing opinions.

To keep confirmation bias at bay, investors should be skeptical, or even better, have a systematic process of disconfirmation. In speaking of disconfirmation, we might also use the terms falsification, negation or refutation.

According to the author, finding divergences between valuations and sentiment, as well as seeing such divergences when they happen, is one definition of investing. Behind that idea is the assumption that economic valuations can be reached without regard for market sentiment and market prices.

Sharma went on to discuss the mechanical process of reaching a valuation and the process of questioning the assumptions behind the numbers. The danger with assumptions is that they are shaped by emotional and psychological forces of which we may not be conscious.

As a result, the process of disconfirmation should start with a thesis that permits the investor to show that the price has not deviated significantly from a credible estimate of intrinsic value. If the investor cannot set up a thesis that can be disconfirmed, then any action taken on the stock will be speculation.

He wound up the chapter with one more distinction between investing and speculation, which is, “the ability to be deliberate and measured through the use of a formal process of refutation. Logic, data, and doubt are the three key ingredients of this process. Formally trying to refute or disconfirm your investment thesis is, in essence, the art of looking.”

After reading this chapter, I’m left with this question: Where do we get our shortlist investment ideas from if not imitation? On the amateur side, Sharma disparages the notion of looking to media personalities and “other authority figures.”

No sane beginner would start with creating investment theses for all 500 stocks in the S&P 500 and then analyzing them all. We all need to begin with a shortlist, and that shortlist has to come from somewhere.

GuruFocus, for example, is based on the premise that we can save a lot of time and avoid losses by imitating great investors like Warren Buffett (Trades, Portfolio), Peter Lynch and Seth Klarman (Trades, Portfolio). Their proven successes make them good candidates for emulation, and their publicly-posted trades make them relatively easy to follow.

Now, we wouldn’t want to develop a shortlist based on what we overheard at a bar on Saturday night, but there’s really no reason for disdaining the advice of successful investors. Remember, we’re not plunging right in, we are looking for companies to analyze in more detail, or in the language of “Book of Value: The Fine Art of Investing Wisely,” we are looking for companies that warrant an investment thesis.

The difference between investing one’s money based on a tip from a media personality or other authority figure and doing your own analysis of a tip is the key. In fact, when we do our own analysis of someone else’s investment idea, it is essentially what disconfirmation or negation is about. Perhaps we have different assumptions that we plug into a discounted cash flow calculator, perhaps we have different views about the importance of cash flow—a disconfirmation analysis will bring out the ways in which we disagree with the analysis of the person we are imitating.

No doubt we would become better analysts if we took someone else’s recommendation and assessed it for ourselves. Finding out where we disagree, and perhaps why we disagree, would challenge our boundaries and assumptions. And anything that challenges us to justify our positions should provide an excellent learning experience.


In chapter 10 of “Book of Value: The Fine Art of Investing Wisely,” Anurag Sharma urged investors to do their own analyses of stocks, rather than simply imitate others.

All of this is part of a broader plan to develop a new theory of investing that includes real human behavior, as opposed to the mathematical and bloodless theory of academic finance. With the idea of disconfirmation or falsifiability, he continues to build a platform that offers scientific robustness.

In my view, all investment activity has to start somewhere, and one could do worse than imitating successful investors. At this point, we are not looking for ideas in which we can immediately copy; instead, we are looking for high-potential companies that are suitable for disconfirmation analysis.

Disclaimer: This review is based on the book, “Book of Value: The Fine Art of Investing Wisely”, by Anurag Sharma, and published in 2016 by Columbia Business School Publishing. Unless otherwise noted, all ideas and opinions in this review are those of the author.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website

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