What prompts the question this week, however, is only tangentially related to investing and has everything to do with the debate about Brexit. Of course, it's not a debate at all. Rather, it's all about two sides shouting past each other, addressing their own constituency and, in the process, polarising opinions and heightening tensions to the point where good judgement is completely forgotten. It's a despairing spectacle - the dysfunctionality of US politics comes to the UK.
Despairing and based on what's labelled the 'rationalist delusion', which, roughly speaking, is what we all indulge in to convince ourselves that we are arguing rationally when we are doing anything but that. The rationalist delusion was popularised in an influential book published in 2012, The Righteous Mind, by US academic Jonathan Haidt, a psychologist who is also the professor of business ethics at New York's Stern School of Business.
The delusion starts promisingly enough. It begins with the notion that clear thinking can lead to something approaching the truth, which - in our context - should mean good investment decisions. This is the stage called "exploratory thought" where, according to Philip Tetlock, another academic and author of the book Superforecasting: The Art and Science of Prediction, "there is an even-handed consideration of alternative points of view". Pretty quickly, however, "exploratory thought" lapses into "confirmatory thought", which, as the label implies, is "a one-sided attempt to rationalise a particular point of view".
But actually, adds Mr Tetlock, that's often the very point of thought. Or, as he says more formally, "a central function of thought is to make sure that one acts in ways that can be persuasively justified".
The key word is 'persuasively'. We need to persuade. We don't necessarily need irrefutable logic let alone an exhaustive consideration of a proposition. We just need enough to persuade. In other words, we are looking for the 'confirmatory bias' - sorry, more jargon - that will make our argument plausible. And, lest my tone should sound too cynical, I should add that more often than not we deeply believe our thinking is sound and that our confirmation is anything but biased. But that's another trick that the mind plays, says Mr Haidt - we are very good at believing our own PR.
Which brings us back to the difference between a 'can' person and a 'must' person. We can best explain our original question with another, this time related to investment: which is the more demanding proposition, 'this share price can rise' or 'this share price must rise'? It's obvious, yet much of the time we prefer the glib attraction of the former - this share price can rise - and we certainly prefer it if we already own the stock or if we are touting the stock as one to buy.
If we own it and the price is falling then the likelihood is we will desperately cling to our original assessment - 'it was my belief that the price would rise because of factors x and y and now I'm going to protect factors x and y as worthy of belief however I can'. It will be no trouble at all to find a bit of new information that will re-enforce the confirmatory bias; so, yes, the share price can still rise.
If you're touting a stock to buy, then 'can' is much more accessible than 'must'. Indeed, it's a fact of life that almost all tips are based on the superficiality of 'can rise' rather than the demanding nature of 'must rise'. And, lest I imply that 'all tips' means 'everyone else's tips', let's demonstrate that in the context of Bearbull's tips.
Take the most recent one - to buy shares in speciality chemicals group Elementis (ELM) for the Bearbull Income Portfolio (see Bearbull, 13 May 2016). That began with churning data through the Bearbull valuation spreadsheets to see if there might be a useful gap between market price and possible value. That was the exploratory thought - an open-minded exercise with no preconception as to the findings. When, however, the gap between price and value looked enticingly wide - 207p played 260p-plus - did I slip a little too easily into confirmatory thought? After all, that was readily available, given that Elementis has a near monopoly in supplying some low-cost yet vital chemicals to its US customers, which translates into good financial returns and a strong balance sheet. Yet for every confirmatory positive, somewhere there is a negative that challenges the optimistic hypothesis. Did I search for those negatives sufficiently?
The bigger lesson to be grasped is that when investors are putting their capital where their minds lead them then it’s vital they think as critically as possible. If some vested interests are content with 'can' then investors have to demand 'must'. Sure, in a sense 'must' is unattainable - how often can one truthfully say, 'This share price must rise'. Even so, the pursuit of 'must' sets the bar appropriately high and too high for the rationalist delusion to clamber over. If only the protagonists in the Brexit debate could be as rigorous.
