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the buy side

Avner Mandelman is a director of Venator Capital Management and author of The Sleuth Investor. He can be reached at amandelman@venator.ca.



Readers may notice that the description under my byline has changed. Pending approval by the Ontario Securities Commission, I will soon be toiling alongside partners in Venator Capital Management, where Brandon Osten and Steve Anderson do due diligence just as meticulously as I do, and have lovely detailed models and computerized databases similar to Giraffe Capital's.

Now why would the Giraffe want to join forces with opinionated (but cool) partners? Because, first, it is fun. But also because it's profitable to kick ideas mercilessly around in a group to see which ones survive.

Seymour Schulich, in his splendid book Get Smarter, recommends that partners give each other veto power over ideas. Such a procedure helps to reinforce seemingly mundane but good ideas, while killing the fascinating bad ones. In his book Mr. Schulich notes he may have several ideas at once, but cheerfully admits that enthusiasm is not always a good criterion for an idea's merit. Hence, as a smart preventive measure, his use of sounding-board partners to kill the duds and polish the nuggets.

This may even have helped Mr. Schulich finance four (or is it five, now?) university programs.



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I can provide proof of this principle from my own time in Stanford's business school, where, years ago, my MBA class was told to imagine we were astronauts about to crash on the moon, and given a list of 20 items we could potentially take to the moon's surface. Since we didn't know exactly how many items we could take - we'd learn this at the last moment - we had to rank the items by order of their survival utility. For example: Is a spare oxygen tank more important than a second bottle of water? What about a rope? Or a gun? How about a hammer? Or a radio beacon? A walkie-talkie? Extra food? Which is more important, which less? We were told that this same list had already been ranked by a team of experienced NASA astronauts, and that NASA's list was to be considered the "right" one, or, rather, the "best available."

Now for the exercise: First, each MBA student was asked to rank the 20 items on his or her own, with these rankings later compared to the NASA ranking. The smaller the number of differences, the "better" the answer.

But then we were split into five-student teams, and asked to rank the list yet again as a group. Naturally, the first hour was spent in what's politely called "process," that is, bickering over who should lead, who should follow. But once this was decided and bruised egos were salved, the debate got down to business and eventually a new list emerged, one from each group. Again, the professor did the sum of differences, and handed out the results.

To the enormous surprise of all us type-A know-it-alls, every team produced a better result than the individual best of any of its members. Furthermore, every team produced a team result that was better than the best of all individual results. Indeed, the worse team result was higher than the best individual effort.

This exercise left a big impression on all of us (as was the intention), because it proved to even the most talented know-it-all that, in a complicated task involving critical decisions, working with good partners and listening to them is almost always better that working alone. Somehow, the group process ensures that most bad ideas are weeded out, even if their owners shout and cajole, while ideas that make sense influence the group's opinion, even if their owners speak softly.

Now, these were high achievers who had learned to use reason and curb their passions, so you may justly claim that these results might not be indicative of other groups. But I don't think so.

Members of every group, when working together at a complicated, important task, often do better than they can do on their own. In fact, for several hundred years, civilized people have been entrusting their liberty and sometimes their lives to this very principle - this is what the jury system is based on. So why not use the same principle to improve your investment performance? For what is stock selection if not ranking "items" by order of their utility to help you navigate a hostile environment - the market?

Yes, it's fun to invest alone and not have to answer pesky questions about the weakness of your reasoning, or the cut corners of your due diligence, or the idiocy of gambling on tout-TV's latest tip. But it's better to have such occasional brainwaves shot down by a cool-headed partner at the cost of mere ego, than have the market shoot it down for a real dollar cost. Why, even Warren Buffett has his partner Charlie Munger, with whom he reportedly chats by phone at least twice a day. Of course, you don't need a Munger, nor do you need to give a veto to your sounding board. But I bet it would be beneficial to your wallet if you were to seek out strong critics before you act on a brilliant new idea. And if the critics' comments wound your ego, why, you can probably salve the wound with the money you save.

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