Tony Coniaris is a Partner, Co-Chairman, Portfolio Manager and U.S. Investment Analyst at Harris Associates. He is currently a co-manager of the Oakmark Select Fund (OAKLX), the Oakmark Global Fund (OAKGX) and the Oakmark Global Select Fund (OAKWX). Tony joined the firm in 1999, previously serving as both an Associate Analyst and Research Associate at Harris. He earned a BA from Wheaton College (1999) and an MBA from Northwestern University (2005).
“Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential.”
-Warren Buffett (Trades, Portfolio)1
Investment management firms like Harris Associates are essentially people businesses where intellectual capital is king. As a result, we attempt to hire the brightest minds we can, as do our competitors, and the industry is full of individuals gifted with well above-average intelligence. Yet intellectual horsepower alone is insufficient for investment success. Even the brightest minds make mistakes and often repeat them. In David Robson’s recent book, The Intelligence Trap: Why Smart People Make Dumb Mistakes2, he does a fantastic job surveying the latest research on why IQ is far from a good indicator of success and what can be done to combat our individual and collective biases. Other attributes are paramount, such as rationality, reflective thinking, intellectual humility and curiosity, along with an organization that works to support these characteristics. While we at Harris and the Oakmark Funds are far from perfect, I was pleased to find parallels in our people and processes that I believe have greatly contributed to our success building wealth for our clients over the last several decades.
To Be Intelligent Is NOT to Be Rational
One of the more surprising and enlightening findings in Robson’s book was the very low correlation between IQ and rationality - a mismatch the clinicians have named dysrationalia. One of the most vivid examples of dysrationalia cited was that 44% of members in the high-IQ society Mensa claim to believe in astrology. Some studies even demonstrate more bias in people with higher quantitative skills as they can more easily manipulate the interpretation of data to suit their desires or beliefs. Warren Buffett (Trades, Portfolio) was clearly on to something when he famously advised investors with 150 IQ points to “sell 30 points to someone else because you won’t need them.” To be rational is to base one’s beliefs and decisions on data as opposed to emotions, instincts or to fall prey to other common cognitive biases (e.g., anchoring bias, availability bias, sunk cost fallacy). At Oakmark, we have always been research driven. Our portfolios are not based on someone’s investment “instincts” or “feel for the markets,” but rather a team executing a well-defined and time-tested process. We simply estimate the intrinsic value of a company and only invest when the discount is at least 30% and the management team and business meet our quality thresholds. Filtering data through the lens of long-term business value reduces much of the emotive, short-term noise that consumes the attention of traders and helps us fight dysrationalia.
Reflective Thinking and Intellectual Humility
Smart people are accustomed to being right and therein lies the danger. If you were a straight-A student, when it came to school work you were right over 95% of the time. The understandable error is to believe this applies more broadly or to the point where one uses 95% as their base rate confidence interval for less certain subjects. Investing in equities is one of these uncertain realms where overconfidence can lead to disastrous outcomes. Reflective thinking and humility are helpful tools to combat overconfidence. At Oakmark, we perform retrospectives at least annually for all companies on our approved list. Retrospectives are a look back at how business value and the original thesis have transpired relative to our original expectations. We seek lessons learned and parallels to past investments to try to improve going forward. It’s remarkable how humbling it can be to look back. But nothing at Oakmark keeps an analyst more humble than our devil’s advocate review process. Here, another analyst challenges the thesis, ultimately presenting the idea as a sale candidate. We then formally vote whether to remove the idea from portfolios and our approved list. Looking back and having the risks highlighted by a devil’s advocate keeps us humble and more likely to produce A+ research.
Curiosity as the Great Motivator in the Search for Truth
The Intelligence Trap gave several examples of scientific achievement that has resulted from dogged curiosity. As Robson points out, “curiosity embraces uncertainty” as a sort of motivator in search of a solution or the truth. If the goal of equity research is being “right” relative to an original thesis, there is no real curiosity and the investor’s interest will eventually fade as they realize they will be “wrong” half the time, if they are lucky. If the goal is discovering the truth, however, then you’re more likely to unrelentingly investigate the facts in search of a thesis--and not the other way around. Admittedly, curiosity is hard, if not impossible, to measure, so you have to hire for it. My attempt to do so for Oakmark would be the lunch hour Google Quotient (“GQ”). Allow me to explain. The analyst team frequently eats lunch together and discusses a wide variety of topics, many beyond investing. On any given day, I estimate about a half-dozen Google searches are attributed to our department lunches where questions are asked and answered, or not. If we stopped hiring people with far-ranging interests who enjoy debating and fact checking to root out the truth, we will have failed the curiosity test. So I guess you could say we're shooting for a GQ of not less than six for Oakmark.
In conclusion, being a successful investor requires much more than raw intelligence. It requires rationality, reflective thinking, humility and curiosity. Thankfully, we have a great team and process at Oakmark that work together toward these ends because unlike my colleagues, I don’t have 30 spare IQ points to sell!
1(Sunder, 2017) https://www.financialexpress.com/market/warren-buffett-says-sell-your-iq-points-they-are-of-no-use-in-stock-market/947022/
2Robson, David. "The Intelligence Trap: Why Smart People Make Dumb Mistakes.” March 7, 2019
The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.
