The Exchanges

Q Why don't we start with talking about how this book came about in the first place?

A The timing's great. The end of October, four years ago, Paul and I were attending the Graham and Doddsville breakfast, the annual event hosted by the Columbia Business School. And afterwards, I asked him what's going on, what's new, just catching up. And he said, ah, I finally bit the bullet, and I'm going to write a book. And I said, oh, great. I don't have the energy or the time to do it, so I think it's great. I said, what is the name of your book? And he said, The Perfect Pitch. And I laughed. And he said, why are you laughing? Thinking I was laughing at the title. And I said, oh, because I've always wanted to write a book. And the book I was going to write is called The Perfect Investment. And he laughed back and he said, wow, how funny we've known each of this all this time. We have somewhat similar investment strategies. He was a former student. We taught together. Probably not surprising that we came up with similar. So we started emailing each other that day and we quickly realized we were writing exactly the same book from different sides. And what Paul would say then, and at the time I didn't appreciate it, is that the pitch is the architecture of the recommendation. The investment recommendation is the pitch. If you can't get the pitch across, you can't come in somebody to buy it, you haven't done the requisite work. And when I first heard that, I was like, that mak…

AI assessment note: “we had agreed to collaborate, despite my sense I didn't want to write a book”

Q Yeah, went from a noun to a verb, or whatever it is. And so few people define, let's just call it a competitive advantage or whatever you think your advantage is in doing research on a name. Um, I loved that you guys define it in the book. Why don't you talk a little bit about what that definition is?

A If you have an efficient market, then price equals value. And because determining value independently requires time and energy, there's a cost to it, right? So you sort of go from first principles and you realize that if price equals value, there's no reason to do fundamental research, go by the index fund, I guess is the conclusion. For a stock to be mispriced, price does not equal value, it has to have one of the conditions of the wisdom crowd has to be violated. That's simple, right, once you invert it. And once we did that, we had our list. So an edge is either I know something the market doesn't know, that's that information, I have figured something out, what we say in the book, I see something the market doesn't see, or I have a trading advantage, which is either I'm willing to trade or I have access to a trade they can't. And that's it. I mean, the good news is we defined it. The bad news is the list is short. And so we really, when we say edge, pure informational edge is really hard to get. Pure analytical edge generally comes with a lot of experience. You've been doing it a long time. You're like, you see something. There's great examples. We talk about Michael Price. When he reads the paper, he does this great exercise. He has so much experience and so many different schemas, we call them, that they trigger little pieces of information triggering his mind, a whole th…

AI assessment note: “So an edge is either I know something the market doesn't know”

Q What is it that the portfolio manager wants to know?

A Every PM asks the same four questions. Now, the thing we've really learned is there's a lot of different vocabulary in the business. But when we go and we press people, they say, yeah, yeah, that's what I mean. So the four questions are simply How much can I make? What is the upside? Why are we talking about this? Why are we spaced spending time? Almost every portfolio manager, once they get kind of comfortable with that, they're instantly going to say, well, what's the risk? Where can this go wrong? Where are the estimates? What's the confidence we have in it? Then the third question, which we really realize is kind of two questions, is number one is, how did the market get it wrong? Why is there a mispricing? And the second piece, part B, is how did you figure it out? Now, You know, it's very important that both of those get answered, because you come and say, the market's wrong, and I've been doing this for two years or three years, and I figured it out versus the crowd. And then the fourth one is, how's the next guy going to figure it out? That's a catalyst, essentially, although that's a word that's controversial as well.

AI assessment note: “Every PM asks the same four questions.”

Q cash flows and what's competitive analysis. A lot of it is sort of how do you think about a business and how do you value the business? There are a couple of things you talk about that were just really crystal clear. Like, so one of them, we could talk a little bit about the wisdom of crowds and how you think about that in the context of an investment.

A The first part of the book is about intrinsic value, the first section. The second section is about how price gets set. And I've been, we've both been involved in the wisdom of the crowds forever. We thought that this was a great mechanism to, to really get practitioners and market efficient academics to understand where that collides. And at the limit, the market may be efficient and at times it has behavioral aspects. And the more we played with wisdom of the crowds, the more we realized that it was an incredibly rich metaphor. We leveraged certainly the stuff that Scott Page has done out of the University of Michigan. I was involved in helping Sawicki kind of get his, which became his book. So we leveraged all of that, and back and forth because of this process, we ended up with six factors, and once we got it, so many things fell into place, and FOMA's market efficiency maps perfectly, and Schiller, Kahneman, Tversky, and Thaler's behavioral fits perfectly into this. And the more we play with it, it's like those chapters just snapped.

AI assessment note: “We thought that this was a great mechanism to, to really get practitioners and market”

Q What information periodical do you read that you find helpful that other people might not know about?

A I can begin. When you read the Wall Street Journal, and you read an article that you know a lot about, You just, you're, you follow the industry, you, you grew up in that business, your parents, whatever it is, you just know a lot. And you read the article, and you're about halfway through, not even a third of the way through, you cringe, because they say something, and you're like, well, sort of true, but not really. Then you get halfway through, and you're like, ah, alright, fair point, but. And by the end, you're just frustrated, and you're like, some points were good, some points were just dead wrong. And then you read the next article about something that you know nothing about, and at the end you say, that's interesting. So, as a rule, which shocks people, I stopped reading newspapers, and what I do is I use all that time to read books. I want to learn to think rather than read the news. Now, you know, I read the headlines, and I'm well aware, and you can't be in the business and not be, but any, any time allocation, I'd rather read books, and I read books all over the map. I'm a Munger fan that way. I do think you need to know multidiscipline. You should know some engineering, some psychology, some sociology, some finance, some economics, some literature. Just because I want to, I want to have a diverse pattern of, of synapse in my brain.

AI assessment note: “I stopped reading newspapers, and what I do is I use all that time to read books.”

Q Great. Well, we've mentioned this paper, and we'll certainly put a link to it. Where is this paper sitting today?

A We published it in a fairly academic structure. It's called Rendering a Powerful Tool, Flaccid, The Misuse of Premortems on Wall Street. We put it out into the wild. We want people to read it. We want people to use it. Certainly, we will consult with them if they have any questions in any way. In a more formal setting, Paul or I will certainly come into an organization. Gary loves doing these, so he's available, but he's the busiest man I know. And he lives in Washington DC, so a little bit harder. I teach this at Columbia Business School, so if somebody's interested, they can come when we talk about premortems for that lecture. Yeah, our goal is to just give this away to everybody as much as we can.

AI assessment note: “We published it in a fairly academic structure. It's called Rendering a Powerful Tool”