What is “due diligence”?
The term is used constantly in the investment business. We are told that we should do our due diligence before investing in something, and often, when presenting an idea, someone will say, “I’ve done my due diligence.”
We hire advisors and consultants and gatekeepers of all kinds because we expect them to perform due diligence. Their pitch books have a page or two about what they say they do in that regard, usually showing a filtering process of some sort that is rooted in “rigorous due diligence,” or some similar phrase.
But what is due diligence, anyway?
One definition: “Reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something.”Oxford Dictionaries | The definition comes from the online cousin of the OED. Notice the legal aspect. Recently, someone said to me that much of the investment business is based “not on giving advice but ... continues
“How reliable is human memory?”
That was the opening sentence of a New York Times articleNew York Times | It is a tidy summary of some of the salient issues. that examined “the fallibility and the malleability” of memory in light of the Brian Williams controversy. It got me thinking.
To explore the questions further, I read The Seven Sins of Memory, published in 2001 by Daniel Schacter, professor and leader of a “memory lab” at Harvard.Harvard | This is the site for the lab. The book serves as a great guide to the flip side of our wondrous capability to remember. As noted on the first page: “Sometimes we forget the past and at other times we distort it; some disturbing memories haunt us for years.” What are the resulting implications for investment professionals and organizations?
But first, the sins: Transience is the degradation of our memory over time. Absent-mindedness is a vexing problem, whether regarding your lost ... continues
A recent Washington Post articleWashington Post | It was titled “The new scientific revolution: Reproducibility at last.” on academic research opens with the story of Diederik Stapel, a professor of social psychology. Despite his stardom, “there was often something odd about Stapel’s research.”
“When students asked to see the data behind his work, he couldn’t produce it readily. And colleagues would sometimes look at his data and think: It’s beautiful. Too beautiful. Most scientists have messy data, contradictory data, incomplete data, ambiguous data. This data was too good to be true.”
There’s been a groundswell of late for a new approach to research, one focused on addressing a key weak link — the inability to reproduce results. Brian Nosek of the Center for Open Science summed up the goal: “Show me the data, show me the process, show me the method, and then if I want to, I can reproduce ... continues
Seth Klarman once said, “You need to balance arrogance and humility . . . when you buy anything, it’s an arrogant act.” However, “you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.”Santangel’s Review | The quotes come from an interview with Charlie Rose.
Or, as Barbara Kruger’s installation at the Hirshhorn Museum in Washington, D.C. yells out in bold letters: “BELIEF + DOUBT = SANITY.”Hirshhorn Museum | Here is the Hirshhorn’s information about it.
It’s important to note that without a certain amount of confidence, we wouldn’t get very far. As individuals that’s true and the same goes for organizations. We are in the business of taking risks, and having the confidence to do so is an essential part of the recipe for success. But how much of it is warranted? A dash, a smidgen, a dollop?
Unfortunately, we know from research study after research study ... continues
More than thirty years ago, Robert Sinclair wrote “Thinking and Writing: Cognitive Science and Intelligence Analysis.” In 2009, it was republished by the Center for the Study of Intelligence, a unit of the CIA, where Sinclair had worked. The monographCenter for the Study of Intelligence | This is the later version, which includes a new introduction and the original work. is worthwhile reading for anyone involved in investment decision making. (I became aware of it as a result of a posting by Miguel Barbosa on SimoleonSense.SimoleanSense | There are a variety of good readings curated by Barbosa; this is his summary of the Sinclair piece.)
Many of the ideas addressed by Sinclair in the original manuscript have been popularized over the intervening years, but even now, “we have not absorbed the science into the way we think about our analytic jobs.” That characterization fits the investment ecosystem as well. For example, the ideas of behavioral finance ... continues