February 2023 Commentary

Over more than a decade (2008-2019), baseball’s Major
League home-plate umpires made every pitch call
correctly on one team roughly twice per season. Among
the 114 umpires with at least 5,000 called pitches during
that time, the range between the least accurate and
most accurate umps is narrower than 4 percentage
points, ranging from 86.2 percent at the low end to 90.1
percent at the high end, with an average of 88.5 percent.
In a comprehensive study of 11 seasons of MLB data by
Boston University’s Mark Williams, Joe West was the
umpire with the second-highest percentage of bad balland-strike
calls when working behind home plate. Over
those eleven seasons, he averaged 21 incorrect calls a
game, or 2.3 per inning, compared to the Major League
average of 14 per game, 1.6 per inning. West made even
more errors than Angel Hernandez, widely regarded as
baseball’s worst umpire, and was clearly among the
lower performing umps. Yet his terrible record was
clearly outdone by his well-earned reputation for
turning situations into conflagrations and making
himself the centre of attention.

Poor decisions and poor deportment are a lousy
combination.

In all likelihood, West wasn’t very self-aware – in his
eyes, everybody else was stating opinions while he was
stating facts. That reality – or failing – is blindness bias,
our well-established tendency to see the existence and
operation of cognitive and motivational biases much
more in others than in ourselves. As Daniel Kahneman,
the world’s leading authority on human error, explained
in Thinking, Fast and Slow: “The premise of this book is
that it is easier to recognize other people’s mistakes
than our own.”

As investment managers, we must recognize that
individually, and as a team, we are likely to have biases
about our stock selection process, the sizing of positions,
portfolio construction, and even risk management.
Certain behavioral biases affect us as individuals, while
others are more prominent in group settings. One way
to guard against groupthink and conformity is to be
thoughtful about the design and management of the
team itself. Collaborative debate and disagreement are
hallmarks of effective working groups and avoids the
pressure to “go along to get along”, a feature that is not
conducive to good decision-making.

Our approach is to begin with a list of “must-have”
attributes in any company we choose to analyze –
business characteristics that enables a company to resist
competitive forces and thereby produce high and
enduring profitability. From there, the primary research
objective is to determine if a business has a durable
competitive advantage and, if so, how that
differentiation translates into its growth profile,
margins, business resiliency, and so on.
The advantage of our approach is ensuring the individual
strengths of the team are focused on debate and
disagreement of businesses that meet our portfolio
needs rather than our own particular biases which may
have detrimental effects on investment decisions. Our
specialty – investing in small-and medium-capitalization
companies – can entail special risks, such as limited
product lines, markets or financial resources, and
potentially greater market volatility than securities of
larger, more established companies. We believe that by
ensuring our fundamental, research-oriented approach
that invests in “high-quality” smaller companies can
minimize many of these risks.

“Having our own way” is inevitably human – unfailingly
and frustratingly human. We’re often wrong, but never
in doubt as my very good friend, Paul, loves to say. Bias,
like wisdom and wealth, compounds, making “our own
way” particularly detrimental.