Blind Spots in Investing

Blind spots are origins of investing mistakes

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Jul 14, 2019
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Blind spot (vision), also known as the physiological blind spot, the specific scotoma in the visual field that corresponds to the lack of light-detecting photoreceptor cells on the optic disc.

I was fortunately enough to attend an event hosted by Peter Kaufman earlier this year. It was wonderful event full of timeless wisdom and insights. My biggest takeaway from the event though, was Kaufman’s insight on how to reduce blind spots.

Kaufman started the event with an intriguing question: “Where Do Mistakes Come From?”

This simple question quickly got the audience scratching their heads, obviously including myself. I started to venture into the possibilities: lack of understanding, incorrect understanding, arrogance, ignorance, inexperience, etc.

Then Kaufman properly applied classic mungerism – inversion. In other words, he started to ask where do mistakes not come from. Mistakes do not come from a shortage of IQ, or a shortage of academic credentials, or a shortage of life experiences.

After eliminating the possibilities, Kaufman revealed the obvious answer:

Mistakes always arise from blind spots!

The next question naturally arises - why do we have blind spots?

Again, it’s not because of a shortage of IQ, or a shortage of academic credentials, or a shortage of life experiences and etc. It’s because we only see things through our own eyes while failing to see thing through all counterparties’ eyes.

The last question is – how do we eliminate blind spots?

By now, you should have guessed the answer. You can’t eliminate blind spots by increasing your IQ and EQ, or by getting a Harvard MBA, or by working for reputable organizations. You have to see things not only through your own eyes, but through the eyes of others as well.

This is such a powerful message, especially for investors who aspire to be more rational over time. Kaufman pointed out that there are six counterparties in a business situation – customers, suppliers, employees, owners, regulators and the communities the business operate within. If we don’t see the business world through their eyes, we will make mistakes, almost guaranteed. As I look back at the investment mistakes I’ve made in the past, inevitably all of them were due to my failure of recognizing and eliminating my blind spots.

In the past I’ve written about my mistakes, which are plenty. Let me use DaVita(

DVA, Financial) as an example, which was a business I analyzed back in 2014 and 2015. My research process was reading annual reports, sell side research reports, conference transcripts, watching management interviews and speaking to management teams and IR representatives. It took me a while to do the research and I felt very good about my research after compiling a lengthy research report to present to the investment committee at the fund I previously worked for. When I pitched DaVita (DVA, Financial), the stock was at almost $80 a share. Today it’s in the low $50s.

It’s now obvious to me that I only saw the business through my own eyes and the eyes of the parties who are naturally biased, i.e, sell side analysts and company’s management team. Of course they only gave me information that I wanted to hear.

Did I speak to the customers? No.

Did I speak to the suppliers? Only one small supplier.

Did I speak to the regulators? No.

Did I speak to the employees? Only the management team and IR representative.

Did I speak to the communities in which the business operate within? No.

No wonder I had huge blind spots about DaVita’s business. Looking back, was it practical to speak to all counterparties involved in the business? If I had tried hard enough, I probably would have gotten access to some, if not all of the counterparties involved in the business. If I had done that, I would have at least some blind spots in my research.

For retail investors, it would be very difficult to “gain access” to all the counterparties involved given time and resource constraints. It depends on the industry. For consumer companies, such as Dollar General (

DG, Financial) and Costco (COST, Financial), it should not be a problem to speak to most of the counterparties. But for some industries like dialysis and aerospace, it would be challenging.

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