The wide-open spaces of Tierra del Fuego are a long ways from the hustle and bustle of New York City. Down at the bottom of South America, you'll see more wild guanacos than people in stuffy business attire. It's clearly not the place that you'd expect to find a new analyst for your hedge fund. But when billionaire Bill Ackman stepped into those crisp, Argentine river waters back in 2004, that's exactly what he found in his fly fishing guide Oliver White.
This is more than just a heart-warming story to put a smile on your face. When Ackman hired White as an analyst for Pershing Square Capital Management, he may have provided investors with his best lesson yet on how to make money in the stock market.
What does fishing have to do with investing?
According to investing great Warren Buffett, success in investing is not about being smart (which I find comforting, but I digress). Buffett says, "The most important quality for an investor is temperament, not intellect." Couple this saying with another Buffett quote: "It's an easy game, if you can control your emotions."
Unfortunately, there's a powerful force working against investors when it comes to their temperamental emotions. And it's why Bill Ackman hired a fly fisherman as an analyst.
Image source: Getty Images.
While most people only know of Yeti Holdings for its insulated cups and indestructible coolers, the company also produces top-notch video content, and Oliver White's story was recently featured.
To be clear, White doesn't have an investing background. But as he taught Ackman to fly fish, Ackman found him to be a great thinker. After the trip, he asked him to read some basic investing books and subsequently hired him as an analyst.
White recalls feeling like a fish out of water while working at a hedge fund in New York City -- he had no idea why he was there. But according to White, Ackman told him, "Everyone here is trained to think the same way and you're going to have a different perspective."
The powerful force working against investors is bias -- confirmation bias, specifically. And multiple billionaires agree with Ackman on this point: If you want to overcome confirmation bias, you must embrace different perspectives.
Check your bias at the door
A bias is just a mental shortcut -- a quick way of processing information. In certain situations, it's useful. After all, we can't stop and think through everything we do. But bias can be detrimental in investing, and confirmation bias is particularly destructive.
Confirmation bias is when we prefer to compile information that supports the things we already believe and exclude anything to the contrary. It's really weird when you think about it. Why would we want to be ignorant about our incorrect assumptions? That's irrational.
Psychologists have theories. It has to do with our emotions -- we prefer the positive feelings of being right more than the negative emotions associated with discovering our beliefs are wrong.
At Ackman's hedge fund, he apparently worried his analysts were too similar in their thinking to overcome collective confirmation bias, which is why he wanted White on his team. In other words, Ackman actively pursues arguments against his investment theses.
It's not just Ackman. Consider these quotes from other prominent billionaires:
- "To perfect our own thoughts and ideas, we need to chew on and debate the ideas of others, even and especially of those with whom we disagree." -- Seth Klarman
- "I recommend stress-testing your thinking with the smartest people you know -- especially those who are smart and disagree with you -- in order to understand their thinking, as it's an effective way of learning and increasing your chances of being right." -- Ray Dalio
- "I never allow myself to hold an opinion on anything that I don't know the other side's argument better than they do." -- Charlie Munger
Ackman, Klarman, Dalio, and Munger all have this in common: They're investors. If they've achieved billionaire status through investing and all agree on this point regarding the need to overcome confirmation bias, how important is it for regular investors like you and me to take this advice to heart?
This approach to investing is at the very heart of what The Motley Fool is about. The term "motley" speaks to the desire to allow for disparate viewpoints. This is why contributors and analysts will often disagree. As Dalio says, these differing viewpoints facilitate better learning and accuracy.
Investors don't need to actually seek out fishermen to improve their returns in the market. But investors do need to embrace motley opposing viewpoints with open arms. In so doing, they'll overcome confirmation bias, a trap that can hinder you from winning what Buffett calls the "easy game" of investing.
