How to Invest Successfully with Unsinkable Conviction

Hands down, my favorite part of my former life as a stockpicker was getting to see how things were made.

There’s unexpected poetry to be found on the factory floor:

a gentle rain of salt falling on cracker dough;

the glow of a blast furnace;

the molds for fiberglass boats, as ghostly as horseshoe crab or cicada molts.

That was the reality our spreadsheets struggled to capture.

Once I went to Florida to visit two of Brunswick’s manufacturing plants — one for Boston Whalers, the other, for Sea Ray yachts. Of the two, the Boston Whaler is the more well-known brand, famous for its “unsinkable boats.”

Not “unsinkable” as in the empty promise that was the Titanic, either.

These boats are literally unsinkable, as in “saw it in half and it still floats.” Or ride it over rapids (even, legend has it, Niagara Falls) and it still floats. This magical property is due to its unique construction: Foam sandwiched between a double hull like an Oreo cookie.

Thinking about unsinkability had me wondering if there was some magic we could inject into our process, one that would create “unsinkable conviction” in our decisions.

Clear decision-making and success in our business depend on conviction.

After all, investing is part facts and figures (where debates are fairly easy to settle) and part squishy things, like predicting the future and quantifying how much fear or greed is already priced into a stock (lots of controversy, unsettleable by facts).

Without conviction, emotions trample decision-making.

Then you find yourself stupidly selling fear (cheap) and buying popularity (expensive) rather than buying hatred (low) and selling euphoria (high).

Individual stock names can be plenty volatile.

There are a number of reasons for this, from the large number of short-term investors who dominate the investment landscape to the fact that news simply gets discounted faster (some argue more precisely) than before.

Whatever the reason, when you combine that with data suggesting that low volatility stocks, the winner of the long-term performance sweepstakes, are hideously expensive, it means that to find value, you have to seek out stocks with high volatility.

[Translated into English: Stocks that don’t go down and up a lot, but are, instead, very steady in the long run, have historically outperformed those that have violent rises up (typical of expensive high-growth darlings) and down (when growth disappoints, valuation gets crushed and sometimes both never recover).]

The point is, if you want to find value, it’s probably going to be accompanied by a large dose of seasickness.

Since chasing value meant we had to deal with more volatile, mess-with-your-head types of stocks, I sought ways to boost our conviction levels, above and beyond the usual things that we did (bottom-up analysis of fundamentals, company visits, conversations up and down the food chain, and Excel models complex enough to launch a spaceship).

There were two techniques that I used to boost conviction.

They were very different from each other — almost diametrically opposed — and it was the reason we employed both. One was checklists. The other was mind mapping.

Checklists

While I’ve been a huge fan of surgeon and New Yorker writer Atul Gawande for years, I finally got around to reading his book, The Checklist Manifesto, in which he makes a compelling case for checklists. Not only have they been proven to save many lives when adhered to in hospitals, but they are also a reason for the success of the Hudson River landing by pilot Chesley “Sully” Sullenberger.

Checklists do two things:

First, they help reduce the cognitive load of having to make many small decisions during repetitive workflows and processes (our brains can handle only so many decisions, especially with the overwhelming information flow typical of our business).

Also, it’s far better to make the big decisions once in the creation of a checklist, and then let the checklist ensure that all steps are done when evaluating a new stock (e.g., Do we check on the quality of the board now or after examining stock compensation?).

A checklist prompts you to get everything done in the order you’ve decided is optimal. You waste no time with each new idea.

For us as investors, checklists take a load off the brain, in addition to helping make sure that all the windows and doors of our investment process are locked, and that we haven’t forgotten to put the alarm on.

Mind mapping

Very different from the way checklists provide peace of mind is the technique known as mind mapping. I began using this approach in earnest when I started writing my company newsletter in 2008.

Diagramming my ideas around a topic helped me clarify and organize my thoughts, which made the writing easier.

I became such a fan of mind mapping that I used our office walls (painted with IdeaPaint, which transformed them into whiteboards) to do so. I would mind map our investment cases as well.

If checklists help the “facts and figures” part of the process, mind maps work on the “sentiment and future predicting” side.

Thinking “out loud” visually allowed me to consider all the angles that affect how investors see a stock in the present — and how they may see it in the future.

It allowed me to flush out key assumptions, see where they may be wrong, or come up with ways to test them. The more we can move from the “conjecture” bucket into the “proven” bucket, the better.

Mind mapping allows for expansive, ruminative, and creative thought, the kind that can be scarce in stock-picking, where there is always more information than time.

Our brains, under constant informational assault, have been shown to shut down and deliver suboptimal decisions.

Mind mapping creates the space necessary for good decisions.

Conviction is one of those hard to quantify states of being — that of evidence-based judgment tempered by experience — necessary to successful investing.

It is, however, rooted in neurobiology and thus easily hijacked.

Why not give ourselves the unsinkable conviction that comes from being sandwiched between the outer hull of checklists and the inner hull of mind maps?

Willy Stöwer, Public domain, via Wikimedia Commons