When Data is an Illusion

Part one of a two-part reflection on Lee Freeman-Shor’s The Art of Execution. Read the second part here.

I read a book whose ideas run contrary to my own investing philosophy. Lee Freeman-Shor writes in his book, The Art of Execution, about a High Conviction approach. He gives a group of fund managers a single rule: invest only in your ten best ideas.

When Lee studied the 1,866 investments they made, he found something humbling. Only 49 percent of those “high conviction” investment ideas made money. Less than half. Some of these “legendary investors were only successful 30% of the time.”[1]

What’s interesting (and also why they kept their jobs) is that they still made money overall — clearly not because they were right, but because of how they behaved. I took away 3 major lessons.

Illusion.

More information did not make them wiser. It made them surer.

Lee talks about what happens when you watch a stock too closely. By checking a stock price several times a day, you see it move — up a little, down a little, then up again. You will conclude that it is volatile. Risky. Unpredictable[2].

But change your review timing. Review that same holding once a year, and same stock looks calmer. Once every few years, calmer still. Nothing about the company changed. Only the frequency of your attention did. The volatility did not change. But your awareness of the volatility did.

And here is why that matters: your perception changed, even though the stock did not — and perception is what drives decisions.

The late Daniel Kahneman wrote about the illusion of validity[3]. He cites his own experience as a young man in the Israeli army, where he and his colleagues were tasked with assessing soldiers to predict who would make good officers. They ran the candidates through group exercises, watched closely, and made confident judgements about each one’s leadership potential.

Then they checked. They compared their confident predictions against how those soldiers actually performed in officer training months later. The predictions turned out to be barely better than blind guesses. Their assessments had almost no predictive power at all.

Despite knowing that their judgements were close to worthless, it did nothing to dent their confidence.

Here is the part that stayed with Kahneman. Despite knowing for a fact that their judgements were close to worthless — it did nothing to dent their confidence the next time they ran the exercise. They went on feeling just as sure. Kahneman reminds us: the confidence we feel when we make a judgement is not a measure of how likely we are to be right. Confidence is a feeling, produced mostly by the coherence of the story we have told ourselves — not by the quality of the evidence beneath it.

We mistake the comfort of a good story for truth. And the more information we gather, the more coherent and convincing that story becomes — so our confidence climbs[4], even when our accuracy does not. More data does not necessarily make us more right. It often just makes us more certain we are right, which is a far more dangerous place to stand.

The same error, running two ways

I think this explains something many of my clients feel but cannot articulate. They believe property is a steadier asset, less volatile than the stock market. And it certainly feels that way. But is it a fact, or is it just because of our observations?

It is not because property prices do not move[5]. It is because you cannot see the prices move. Nobody publishes a live price for your home every second of the day. You are not refreshing an app to watch its value tick up and down. Its price is marked only occasionally, by an estimate, when you happen to ask. The stillness you feel is not stability. It is the absence of a screen.

So we have the same human error, running in two opposite directions. With stocks, constant information makes a normal asset feel dangerously volatile. With property, the absence of information may make a genuinely volatile asset feel reassuringly calm. In both cases, we are not responding to the risk. We are responding to how the risk presents itself.

That is worth sitting with the next time you feel certain about an investment — calm or anxious. Ask whether you are reading the asset, or merely reading how often you are forced to look at it.

Stay patient. And be a little suspicious of how certain you feel.

In part two, I share my two other lessons. How returns actually arrive — and to the one place where I respectfully disagree with the book.

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I write on topics related to financial habits and decisions. Do explore my other articles at https://www.williamseah.com/blog if the ideas resonate. Drop me an email at reach.william@gmail.com or text me at 9673 1523 if you'd like to chat over coffee or whisky.

References

Freeman-Shor, L. (2015). The Art of Execution: How the world’s best investors get it wrong and still make millions. Harriman House.

Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.

[1]The Art of Execution, Freeman-Shor, Lee. In the chapter, When the Best Fail.

[2] You might be forgiven into thinking this is something investing professionals are inoculated against. But they are not. “By monitoring a stock they (professional investors) are invested in several times a day, they notice the share price moves up and down quite a bit. The price seems volatile”. In the chapter, Too Professional. The professionals are equally affected by the awareness; what makes them better is how they respond.

[3]Thinking, Fast and Slow, Kahneman, Daniel. 2011. In the chapter, The Illusion of Validity.

[4]He does a fascinating experiment where he adds additional IRRELEVANT information, and the candidates actually used that irrelevant information to become more confident.

[5]There is evidence that property prices DO move down. Check out agents’ advertisements who warn about mistakes, and how clients lost money.