Investing stories vs. facts

I read an interesting article by John on his blog masterinvest.com. John is discussing Investment Stories vs. Facts. I thought this was relevant given the big sell-off in Indian markets on past Friday and the stories about what caused it.

John asks who doesn’t love a story. Those tales of woe and drama, intrigue and suspense; and the better the storyteller, the more we’re usually hooked. Stories sell. We often believe them without thinking or questioning. And they can have an unjustified weight on our perceptions. Consequently, stories often impact markets and our investment decisions when they shouldn’t. Why do we believe such stories? Why do we get hooked into these narratives that are neither factually correct nor accurate? The answer is, we are wired that way; mankind actually hasn’t evolved much from the days we spent hunting and gathering. One of the key skills that allowed us to progress from these primitive beginnings and reach the top of the food chain was collaboration. And collaboration involved stories.

Investing stories can be dangerous. It is little wonder the world’s most successful investors are mindful of this. “Most stock-picking stories, advice and recommendations are completely worthless.” Ed Thorp. “Stories are more powerful than statistics because the most believable thing in the world is whatever takes the least amount of effort to contextualize your own life experiences.” Morgan Housel. “Of all the dangers that investors face, perhaps none is more seductive than the siren song of stories. Stories essentially govern the way we think. We will abandon evidence in favour of a good story.” James Montier. Stories appeal to our emotional side and they often blind us to the underlying facts. Stories are quick and easy. It is human nature to respond to emotion before reason. That’s how we’ve evolved. Because stories often lack statistical rigour, they provide a false representation of reality. They can also suffer from wishful thinking, poor analysis, inappropriate analogies, or incorrect observations. Overcoming the pull of stories requires keeping an open mind, collecting all the facts and testing investment ideas. Before acting on stories and narratives it’s important to test their validity. This can be done by collecting more information. When false narratives and stories are prevalent, stocks trade at the wrong prices; the stock price reflects the narrative, not the facts.

John concludes that the moral of this story is: be mindful of other stories and get the facts. And only the facts. Investors’ task is to sift through the stories out there and find the kernels of truth, the facts that will determine if the story is correct. And while you’re doing it, don’t let other people’s emotional reactions or beliefs influence you to a different way of thinking. Don’t let urban myth dictate your investment activities. And whatever you do, look for evidence where stories are based on a sample size of one. John implores us to trust him when he says, stories not hard to find, they’re just very hard to ignore.