How We Think
These topics, which are largely excerpted from client letters dating back to our 2001 inception, provide insight into our philosophy and the key tenets that have consistently underpinned our investment approach, which has remained unchanged since our founding. These ideas and concepts are not all-encompassing but do provide a sense of “how we think” and our application of our investing philosophy.
Topic: Psychology
We focus intently on what we know and don’t know and think often about how to avoid, manage, and minimize the common errors of psychological misjudgment. Being disciplined enough to stay within our circle of competence is critical to our success.
The Long-Term Effect of Engagement Algorithms on Earnings
In the last decade, we have watched internet/social media companies iterate and improve user engagement first through a deluge of A/B tests and now through machine learning techniques. Powerful computers are collecting mountains of data about a wide variety of…
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Undiscovered and Unloved
The stock market is generally efficient, and the prices of individual stocks trend towards the underlying intrinsic values of their respective businesses. As value investors, we rely on this efficiency – we expect that temporarily mispriced businesses will eventually be…
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Recency Bias, Global Interest Rates, and Return Expectations
Evolution has rewarded humans (and animals in general) for recency bias. For example, if one of our ancestors found food down a certain path one day, that was probably a good place for him to look again the next day. …
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Incentive Misalignment in the Money Management Business
As we have written before, the art of successful investing requires both discipline and an even temperament. The more emotional an investor becomes, the more likely he is to buy high and to sell low – following the herd to…
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The Mind of a Value Investor
Seth Klarman, one of the best investment thinkers and writers within our discipline, recently gave an insightful perspective on the mindset of value investors during an interview with Charlie Rose: Value investors have to be patient and disciplined, but what…
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Commitment Bias
It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain Any honest post-mortem of the investment decisions we have made at Cook & Bynum over the past…
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Greedy When Others Are Fearful
The first quarter of 2009 saw continued turmoil and fallout from the bursting of the housing bubble. The broad-based decline of virtually all equity markets around the world continues to present us with attractive buying opportunities. We can give no…
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The Danger of Leverage
As value investors, we make the assumption that the market is irrationally pricing a security now, and we expect the market to value the same security more rationally in the future. However, we have no expectation nor guarantee that the…
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The Psychology of Errors
An important differentiator between our selection process and the processes of the value managers we respect is the time and effort we spend on analyzing how psychological factors affect decision making. A number of different factors cause people to systematically…
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