December 7, 2021

In today’s world, we’re bombarded with information from every direction. With more books, articles, studies, and datasets that ever, we should be getting wiser. Unfortunately, things don’t really work that way. Information overload can make it harder to find the truth — what data should we even be paying attention to? In the investing field (as well as others), it’s particularly important to get things right. That’s why I always fall back on fundamentals.

We’re all vulnerable to a particular kind of cognitive error. People don’t think in facts as much as stories. Stories are good because they help us relate to the world. They make sense, and help us feel like we understand things. That’s great, when our stories are accurate or at least benign, but there’s also a huge hidden danger — stories can be completely wrong. If we’ve already bought the narrative, we might not realize our mistake until it’s too late.

Wrong-headed narratives are everywhere. Hard data tells us that crime, violent deaths, and disease are down, pretty much everywhere, except for a few war zones. Wealth, literacy, and life expectancy are way up. Humans have never had it so good, but if I were to base my picture of the world on the nightly news, I would have a dramatically distorted view. I would be irrationally afraid of the future, and I would probably make bad investment decisions based on a faulty narrative.

It’s counterintuitive, but knowing more doesn’t necessarily help. Even if the news is all true, we can easily get things dead wrong because we’re looking at the wrong facts, or lacking context. Confirmation bias — only absorbing information that fits our opinions — affects everybody.

While mistakes in life are inevitable, thinking in terms of facts and fundamentals can help steer us in the right direction, and that rule applies especially to investing. Obvious or “common sense” narratives are wrong a lot more often than you would think. I can’t count the number of times I’ve heard about a “hot” real estate market that is destined to continue its growth. Then, when I check the data, I find that growth in that market has already leveled off. I might still want to invest, but buying into hype is a recipe for overpaying — prices have to reflect reality. Similarly, selling early from unwarranted fear is a great way to miss out on great long term gains.

For Alliance, this is the heart of our fundamentals based investing. Don’t just assume others are right, and go find the relevant facts. The key data points will usually speak for themselves. And when research contradicts the popular narrative, that often points to the biggest opportunities.

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