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Standard Antidotes to Groupthink
Irving Janis proposed nine ways to combat groupthink. One is that “the leader of a policy-forming group should assign the role of critical evaluator to each member, encouraging the group to give high priority to airing objections and doubts. This practice needs to be reinforced by the leader’s acceptance of criticism of his or her own judgment in order to discourage the members from soft-pedalling their disagreements.” Another way is that “throughout the period when the feasibility and effectiveness of alternatives are being surveyed, the policy-making group should from time to time divide into two or more subgroups to meet separately, under different chairpersons, and then come together to hammer out their differences.”
Thirdly, “one or more outside experts or qualified colleagues within the organisation who are not core members of the … group should be invited to each meeting on a staggered basis and should be encourage to challenge the views of the core members.” Fourthly, “at every meeting devoted to evaluating policy alternatives, at least one member should be assigned the role of devil’s advocate.” A fifth means to resist groupthink was that “after reaching a preliminary consensus about what seems to be the best policy alternative, the policy-making group should hold a ‘second chance’ meeting at which the members are expected to express as vividly as they can all their residual doubts and to rethink the entire issue before making a definitive choice.”
The institutional imperative, it bears repeating, is the tendency, particularly marked during certain (typically “boom” or “bust”) times and virtually always present if not prevalent within large organisations, to imitate others’ behaviour – no matter how demonstrably silly or self-destructive that behaviour might be. Janis’s antidotes to groupthink, whatever their effectiveness, leave untouched its cause – i.e., decision-making by group, team or committee. Its antidote, as Janis implies, is neither more intelligence nor more resources. The description of Mensa’s investment club in Letter 21 cited evidence to show that even prodigiously “smart money” can be comprehensively stupid.
Nor is the conquest of groupthink a matter of access to complex mathematical models, large amounts of data and the forecasts generated from them. These forecasts, as Letter 32 and a variety of academic studies have shown, are so prone to error (particularly of the vastly overoptimistic variety) that they are worthless. Further, as William A. Sherden has demonstrated in his outstanding book The Fortune Sellers: The Big Business of Buying and Selling Predictions (John Wiley & Sons, 1999, ISBN: 0471358444), a pencil and plain ruler tends to be more accurate than the extremely complex methods used by prestigious firms equipped with Ph.D.s from world-class universities. The same point generalises to weather, demography and most areas of private and public management.
Peter Drucker, for example, wrote in his seminal book Management: Tasks, Responsibilities, Practices (Harper & Row, 1974, ISBN: 0060110929) that “forecasting is not a respectable human activity and [is] not worthwhile beyond the shortest of periods.” The startling fact that simple methods and clear logic can outperform highly educated and intelligent professionals across a range of areas of human experience appears to be more than co-incidental. That experts and their conclusions, which are routinely accepted with little or no question, are often no better than flipping a coin or making naïve (or intuitive) guesses implies that the money paid to such experts is an utter waste. Worse still, the costs of the decisions premised upon erroneous analyses are forbiddingly high. Just ask the hundreds of thousands of Australians who, acting upon professional advice, placed substantial amounts of capital into dot coms and the T2 float.
Graham’s and Buffett’s Individualist Remedy
The focus of Leithner & Co. is therefore upon simple and fundamental principles rather than complex and esoteric mathematics. This spirit owes much to Benjamin Graham. In “The New Speculation in Common Stocks” (The Analysts Journal, 1958), he wrote that “in 44 years of Wall Street experience and study I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever [calculus] is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.” Mr Graham’s student and colleague, Warren Buffett, has uttered similar sentiments (Fortune 1990 Investor’s Guide): “you don’t need a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” But note carefully: to say that something is in principle simple is not to say that it is easy. The principles of marital fidelity and longevity are straightforward – but apparently for many, insuperably difficult to practice.
The antidote to the institutional imperative, then, is not intelligence or resources but temperament. It has been perfectly possible, on the basis of valid and reliable data available to the general public at little or no cost, to formulate arguments which dispute, place into grave doubt and perhaps even refute some of the most fervently-held fallacies of the past several years. With respect to the internet mania, for example, ‘The New Economy’ and ‘Tech’ Stocks: Speculators Still Don’t Get It is an example; and with respect to Telstra, see Telstra: A Contrarian Case for Caution, Australian Blue-Chip Cover Stories and Leithner Letter 19 (26 July 2001) Letter 21 (26 September 2001) and Letter 29 (26 May 2002).
To resist the institutional imperative is to allocate assets on the basis of value rather than popularity. Grahamite value investors strive to use justifiable premises, valid logic and reliable evidence to reach sound conclusions. They are not dissuaded from a course of action simply because “experts” or “the market” may disagree. Rather, as Graham wrote in The Intelligent Investor, “have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it – even though others may hesitate or differ. (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)” Indeed, and as he also emphasised, “the right kind of investor [takes] added satisfaction from the thought that his operations are exactly opposite to those of the crowd.”
It follows that Graham-style value investors, unlike most (particularly major institutional) market participants, are staunch individualists. They work either alone or with one or at most a handful of partners, and virtually never within large organisations. To a considerable extent, if not necessarily completely, they would sympathise with the views American novelist William Faulkner, the Nobel Laureate for Literature in 1949, who in an interview whilst on sabbatical at the University of Virginia in 1958 stated his view on the individual vis-à-vis the group:
Q: Most of your characters are certainly highly individualised human beings. Do you have any particular ideas on the so-called trend towards conformity, the loss of individualisation in our current society?
A: Yes, I have very definite ideas about that … I’m against belonging to anything.
Q: Why is that?
A: I think that one man may be first rate but if you get one [such] man and two second-rate men together, then he’s not going to be first-rate any longer, because the voice of that majority will be a second-rate voice, the behaviour of that majority will be second rate …
Q: Can you go further and say how you rate people like that – first- and second-rate?
A: Well, sir, … I would say that a first rate man … is a man who did the best he could with what talents he had to make something which wasn’t here yesterday … that [he] never harmed the weak, practised honesty and courtesy, and tried to be brave … whether he was always brave or not. I think that a man who held to those tenets wouldn’t get very far if he were involved in a group of people that had relinquished their individualities to some one voice …
Given their individualist bent, it follows that value investors seek and analyse primary sources of information, discount secondary sources (such as opinions and media reports) and keep their own counsel. They also draw a sharp distinction between the popularity and the rationality of their actions, ignoring the former and emphasising the latter. Like Ralph Waldo Emerson, then, so too the value investor: “it is easy in the world to live after the world’s opinion … but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”
 
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