Columbo’s Guide to Smart Investing

Back in 2009, like millions of other Americans, our family hit the road on Memorial Day weekend.

We headed for Gaithersburg, Maryland and the prestigious Potomac Memorial Soccer Tournament. With both of my kids involved, I had twice the usual number of games to watch — in 90% humidity and 90-degree weather — for a total of nine games over three days.

I loved every minute of it.

As an intense and highly competitive person (what money manager isn’t?), each match I watched may as well have been a World Cup final. It was only because I had taken up sports photography that I was able to keep my blood pressure and decibel level under control.

However, there was another benefit to watching so many games.

I got to observe a lot of different coaching styles, and in particular, that of my fifteen-year-old’s coach, Shawn Hart. Unlike many coaches who seemed to rely on a system of vague primal screams shouted from the sidelines, Shawn gave very specific directives. I overheard him telling players to “tuck in,” “get behind the ball,” or mark a particular man.

I even heard him tell an ineffective forward to just “put the ball on the ground and kick it at the goal.”

His communication style — one based in specifics — was largely responsible for his success as a coach. (My son’s team won the tournament that weekend, despite having played together for just one year.)

But it’s not just soccer coaching where clear and specific language adds value; the more concrete, the better we human beings process and remember information.

Chip and Dan Heath’s best-selling marketing communications book, Made to Stick, makes this point in spades:

Naturally sticky ideas are full of concrete images — ice-filled bathtubs, apples with razors — because our brains are wired to remember concrete data. In proverbs, abstract truths are often encoded in concrete language: ‘A bird in the hand is worth two in the bush.’ Speaking concretely is the only way to ensure that our idea will mean the same thing to everyone in an audience.

Language that is specific is also more credible.

Consider the Columbine tragedy, for example. Journalist Dave Cullen wrote a book on what really happened twenty-two years ago (all the initial media reports were wrong, it turns out).

In it, he explains that, according to an FBI report on school shooters and how to identify threats, “… the more direct and detailed a threat is, the more serious the risk of its being acted on.”

While this may seem obvious, if we’re not aware of the tight connection between specificity and future action, we’ll pay more attention to the threat loaded with emotional language rather than the one filled with deadly details.

In the world of investing, specificity also plays an important role, whether we’re evaluating stocks, companies or the people who run them.

The stock-picking industry, in particular, is drawn to jargon. Professionals toss around terms like “return on invested capital,” “incremental operating leverage,” and “swing capacity,” without always having a clear, detailed view of what’s really going on inside a company. As a result, it’s easy to have a long conversation that stays in the realm of the abstract.

But the valuable information is buried in the concrete.

That’s why in practice, when looking into a company, we’d don our Lieutenant Columbo persona. (For those of you too young to remember, he was a bumbling and disheveled detective. Whenever he was about to walk out the door after questioning a suspect, he’d whip around and say “just one more thing….” and the jig would be up.)

So we’d ask very specific — some might even say “dumb-ass” — questions that would blow our investment case wide open. It was these types of questions that allowed us to understand the realities that drove the construct we called “the financials.”

For example, when management explained that it was taking steps to “align compensation with shareholder goals,” we’d want to know exactly how that would be implemented.

If it meant that the sales force no longer had pricing discretion, or that commissions paid would be based on the profitability of the deal, we could calculate the odds that earnings would be better going forward.

Incidentally, in terms of evaluating your money manager and how he or she is investing your assets, the same rules apply.

If you don’t ask concrete questions — questions that yield specific, detailed, understandable answers regarding practice, behavior and process — you’re flying blind.

Questions like: “What were the last three stocks you sold?”, “Why did you sell them?”, “What was your return?” and “How long did you hold them?” are guaranteed to give you a truer picture of your manager’s sell discipline than the marketing brochure will.

Value is created on the ground, and specifics are what help ferret this out.

In the end, it’s not that business and finance types are always trying to hide something. It’s just that they have a weakness for abstract and technical jargon, and they get used to speaking in business and marketing tongues. Just remember that true insight will always be found in the details and in plain English.

It’s the only way to know if the ball is actually headed towards the goal.

Photo credit: TV studio, Public domain, via Wikimedia Commons