How Do You Know?
Subtitled A Guide to Clear Thinking About Wall Street, Investing, and Life.
Summary
Christopher Mayer applies Alfred Korzybski's general semantics to investment analysis. Korzybski's claim, set out in Science and Sanity in 1933, is that human beings confuse their verbal abstractions with the things those abstractions describe, and that most reasoning errors follow from that confusion. Mayer works through the specific forms this takes in markets: treating a company's name as if it denoted a fixed object, treating an accounting figure as if it were the underlying economic fact, and treating labels such as growth stock or value stock as if they carried information about the security.
The practical apparatus comes from Korzybski and from Wendell Johnson. Mayer recommends dating statements, so that General Electric in 2001 is treated as a different object from General Electric in 2017. He recommends indexing, so that bank number one is not assumed to behave like bank number two. He recommends etc., an explicit acknowledgement that any description of a company omits most of what is true about it. He supports these with investment examples and with reflections on his own errors.
The book is short and idiosyncratic, and it does not offer a valuation method or a screening approach. Korzybski's system has never been accepted in academic linguistics or psychology, and readers should treat it as a discipline for handling one's own language rather than as a validated theory of cognition. The overlap with more familiar material on base rates and overconfidence is considerable, and Mayer does not always distinguish his contribution from that literature.
Key takeaways 7
- An accounting number is an abstraction several layers removed from the economic activity it describes, and analysts routinely forget the distance.
- Statements about a company should carry a date, because the company that existed when the thesis was formed no longer exists.
- Category labels such as growth and value describe the analyst's classification scheme rather than any property of the business.
- Any description of a company is necessarily incomplete, and the appropriate response is to hold conclusions loosely rather than to seek more detail.
- Investors mistake the confidence produced by a fluent narrative for evidence about the underlying business.
- Words such as bubble, recession and crisis create the impression of a single identifiable event where a range of different phenomena exist.
- The most useful question an investor can ask about any claim is how the person making it came to know it.
Who should read it
Investors who already have a valuation process and want a discipline for auditing the language in which they state their own theses.
About Christopher Mayer
Co-founder and portfolio manager, Woodlock House Family Capital 2018-present; previously newsletter writer at Agora Financial
100 Baggers turned Thomas Phelps's buy-and-hold arithmetic into a working screen and has outlived its publication cycle as a reference for long-hold investors.
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