Monday, May 25, 2015

The Detective and the Investor

One of the first books I read when I started learning about investing was Robert Hastrom's "The Warren Buffett Way." Hagstrom is a writer who excels at seeing connections and finding patterns.

As a fan of detective stories in general and Holmes in particular, I was happy to uncover a Hagstrom book from 2002, called "The Detective and The Investor." Its out of print now, but easy to find copies on Amazon. If you like investing and detective novels then you will enjoy it, because Hagstrom finds a lot of common thought processes from great detectives  and investors.

There is a chapter dedicated to the specific techniques of the three main subjects that Hagstrom covers: Poe/Dupin, Conan Doyle/Holmes, and Chesterton/Father Brown. Each chapter then links what the investor can learn from the methods of the detective.

Hagstrom draws out the Habits of Mind from the great detectives:

  • Auguste Dupin
    • Develop a skeptic's mindset; don't automatically accept conventional wisdom
    • Conduct a thorough investigation
  • Sherlock Holmes
    • Begin an investigation with an objective and unemotional viewpoint
    • Pay attention to the tiniest of details
    • Remain open minded to new, even contrary information
    • Apply a process of logical reasoning to all you learn
  • Father Brown
    • Become a student of psychology
    • Have faith in your intuition
    • Seek alternative explanations and re-descriptions
Hagstom skillfully traces the evolution of the detective novel, which he says begins with Poe's Dupin. The book shows how each of the three detectives refined the craft of the detective and brings new methods to the table. Each of these prove useful to investors as well.

Dupin shows the value of plodding detective thorough investigation (Hagstrom calls this the document state of mind) when combined with the tenacity to dig out as many facts as possible. This is done both by confirming and disconfirming observations. The most talented, productive people that I have worked with are the ones who work the hardest at beating up their own ideas.

Holmes has many qualities of successful investors. To cite one example, Holmes works at determining the underlying factors of what appears as self-evident. Holmes says "There is nothing more deceptive than obvious fact." That quote immediately brings to mind Charlie Munger's - "every time you see the word EBITDA, you should substitute the word ‘bullshit’ earnings.”

In the Father Brown chapter, Hagstrom shows how Buffett's famous Coca Cola purchase occurred at a time in 1988 when Coke was selling at five times book value, a below average dividend yield and an above average P/E. Where was the buy signal? Yet Buffett found it, put in $1 Billion and it led to one of the best investments of his career. Though the raw numbers did not show it, Buffett, like Father Brown, saw that things are not always as they seem.

Its a unique book on two of my favorite topics, so its hard to have too many quibbles. Some of the analogies and linkages are a bit of a stretch, but that is unavoidable in this type of writing, and the main points that connect the analytical toolboxes are expertly linked. Chesterton's work went well beyond detective novels and it may have been interesting to hear more about his other work as a logician. But these are minor points, like licorice this book is not for everyone, but the people who like it will like it a lot. If this is the kind of book that you will like, you already know it by now. I think its a hidden gem.

1 comment:

  1. Sounds very interesting. Will have to pick up a copy and give it a quick read. Thanks for bringing it to our attention!