Great thread by @IgnoreNarrative https://twitter.com/IgnoreNarrative/status/1293010041126166528?s=20

Made me think of two great pieces of advice I've received from two very talented investors:

“Investors make investing a lot more complicated than it needs to be”

and 

“Reality is rarely that simple”

They seem contradictory... but they’re not. 

We love complex problems, but are moved by simple narratives.

Investors generally love complexity.

Sometimes for good reasons (tax efficiency!), sometimes for its own sake (a gigantic SOTP model).

Complexity is fun, it's challenging...

We love to believe that our "edge" could be that we are smarter... that we have a better model, a unique insight...

This is fine; you need to be a little arrogant as a public market investor, especially in large cap US equities! It's a pretty efficient market. Forming a thesis and building conviction is important.

But this makes us prone to stepping on landmines. A meticulously researched turnaround thesis... that fails to materialize. A mosaic-theory short pitch that plays out as you expected... but the mkt doesn't care. Your sincere belief that you have found the next TDG / MNST / AMZN

The more mental gymnastics you have to go through, the more suspicious you should be. 

The bigger your model, the more explicit you should be about the key underlying assumptions.

(It also gets harder to pass on a name the longer you spend working on it. Especially if you have to explain why you wasted time on it to your boss!)

I think @schaudenfraud said it best: "Putting a turd under a microscope won't change it into a diamond."

Sometimes a really simple thesis is the best thesis.

But simplicity has its own failings -

We love stories. And stories generally follow simple arcs. Good guys and bad guys. Clear plot progression. Little ambiguity. Few loose ends. But that's just not reality.

It's enormously powerful to have a simple narrative behind your stock. It's almost like putting out long term guidance. It gives shareholders something to anchor to.

But it can be the equivalent of putting blinders on.

It's uncomfortable to simultaneously believe "much of SaaS is presently overvalued" and "software is eating the world".

Or "this company is playing games with its depreciation schedule" and "they are executing well, and the stock is probably a long".

There are almost always two sides to a story. Not just in investing, but generally. Fundamental attribution error, etc.

It's easy to construct a strawman, "The other side is dumb, because X, Y, and Z". But when there's a genuine debate, the guys on the other side probably aren't all morons. This industry, as a whole, is filled with pretty smart / driven people.

So, in summation, don't believe the output of your 20 sheet pro-forma merger model without checking your assumptions.

But also be wary of 1-sided narratives.

...so what do you do?

It's always difficult to balance "conviction" with "overconfidence".

Personally, I've tried to manage this by being very explicit about why I am in a given stock, but it's still challenging.

I've also become more comfortable with ambiguity / uncertainty as I've gotten older. Which I suppose you could interpret as a lack of conviction... but I find it preferable to "manufacturing" conviction through very marginal checks / data / etc.

I'll still try to find answers... but, if the evidence is weak (and it often is when there is real uncertainty), I'm going to treat the output as little more than a working theory.