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Grahamites
Grahamites
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Decision Points, Idea Generation and Research Process

Better idea generation and research process following Josh Davis' advice

March 05, 2018 | About:

I was talking to a friend recently and he asked me this question: “How do you decide what stocks to do research on and how do you decide the amount of time allocated to research each stock?”

It sounds simple, but it’s a great question. It reminds me of the book summary on “Two Awesome Hours – Science Based Strategies to Harness Your Best Time and Get Your Most Important Work Done,” by Josh Davis.

Let’s re-visit Davis’ work for the purpose of discussion. First of all, Davis suggests that our minds operate like computers to some extent – when we are on autopilot mode, we would automatically work on the tasks at hand without thinking about whether these tasks are worth the time and effort. Just like when computer programs are running, they won’t stop unless commanded so.

Secondly, Davis says that in order for us to achieve peak productivity, we have to pay special attention to what he calls the decision points, or moments between tasks. Davis observes that when we are faced with decision points, most people would rush through them and grab the task that’s most available at the moment.

Thirdly, Davis brings up the great principle of the least effort, which Daniel Kahneman also writes about in his famous book, “Thinking, Fast and Slow.” It is that “A general ‘law of least effort’ applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.”

Last but not least, Davis said in an interview, “To tackle the impacts of unconscious bias, you really want this to be a systemic thing. We should set up systems and processes for gathering all the information and ensure we go through certain steps before making the decision. ”

Great, but how are the above points related to investment research process?

Let’s take the principle of the least effort as an example. If wouldn’t take long for us to realize why the Graham approach is so popular – because it takes the least effort. What do you need? Low P/E, low P/B, the stock trading below liquidation value. If you buy a basket of those without deep research, you may achieve the same goal as other investors who do deeper research – to outperform the market.

Or let’s think about why most people use first=level information and think on the first level – it requires the least effort.

What about decision points? Well, think about how we generate ideas. Each idea is a decision. Let’s say you’ve just finished research Disney (NYSE:DIS). How do you decide what’s the next company you should be working on? Do you take a systematic approach? Or do you rush through the decision by picking up the stock that just hit the 52-week low?

What about autopilot? Once you start researching a company, do you think about whether the company is worth your time and effort at all? Once we start doing research on a company, unless we take a conscious effort, we’ll be continuously working on it until we are done with our research.

All of the above are non-optimal, but we are wired to act in such ways by evolution. A non-optimal research process inevitably results in non-optimal investment results.

What’s the optimal approach then? All we need to do is to apply the “inversion principle.”

Instead of rushing through decision points, we start by asking questions, such as why is it a good idea to research this company. What are my opportunity costs? And how can I widen my moat, or how can I expand my circle of competency if I research this company?

Instead of running on autopilot mode, we can design check points in our process so that we can intentionally evaluate whether it makes sense to complete the project.

Instead of applying the principle of the least effort, we apply the principle of the more effort. We start with the least effort – first-level information and first-level thinking  and continuously seek second-level information and gain second-level insight.

Conclusion

Decisions regarding backlogs of ideas and research processes are critical, yet we are wired in a way that often leads to sub-par decision making. By inverting and following Josh Davis’ advice, we can improve our idea generation and research processs.

About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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