We’re a story-telling species. Here’s how it works:
Every day we take in terabytes of data. What the weather is, how we’re feeling, what the coffee tastes like. But we simply can’t process all the information. Even with built-in DNA computers and quantum computations, our brains can only handle so much. So we construct narratives to put the information into context—to give it meaning—and to help us remember the details.
The problem is, some of those stories are pure fiction. For example, early in his presidency Gerald Ford suffered some athletic mishaps—serving the ball into his tennis partner while playing doubles, tripping off the steps of Air Force One, or some missed shots while golfing—and so got an undeserved reputation as a bumbler, in spite of his outstanding athleticism. He was a star football player in high school and college. But the story took on a life of its own and the truth remained hidden.
When evaluating investments, the companies and managers we invest in are bound to have stories behind them. But we have to be careful to make sure the story is true. For years, Apple had the reputation of the nerd’s paradise—high-end, expensive toys that were more beautiful than functional. The business almost failed twice, until Steve Jobs remade it with the i-everything. Now a new story has taken hold. Warren Buffett still enjoys an aw-shucks reputation as a plain-spoken everyman, in spite of his bizarre personal life and somewhat imperious style.
If we don’t check the stories against the facts—a company’s financials and products, a manager’s long-term track record—we can be taken for a ride. Enrons masquerade as Exxons, hiding their debt with derivatives. Only by digging, asking, probing can we know the truth, the real story.
Douglas R. Tengdin, CFA
Chief Investment Officer
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