Perspective


  • August 27, 2020
  • Chuck Osborne

Straw Man

One of my favorite parts of my job is that we are constantly learning. All endeavors, whether it is sports or business, can teach life lessons. One of the great life lessons in investing is to take your opponent seriously. Every time we buy a stock, someone is selling it. Why?

Why are they willing to sell something we believe should be bought? I have known of firms that force their analysts to take opposite sides of this argument and debate one another in front of the investment committee. They do this in an effort to make sure they are truly considering why they may be wrong. We have never gone to that extreme at Iron Capital, although I often play the part of devil’s advocate in our investment committee meetings.

We don’t do it because in my experience when one is asked to argue a point of view that she does not actually believe in, she will tend to create a straw man. As a reminder, a straw man is an intentionally misrepresented proposition that is set up because it is easier to defeat than an opponent’s real argument. We may be debating if we should invest in Apple, for an example. (As always, this is an educational example not a recommendation to buy the stock; I do own Apple, and we own it in client accounts where we have deemed it appropriate.)

The argument for Apple is that their business has never been better. The new phone really is an improvement and services are finally taking off. The argument against Apple is that its stock has risen too far too fast and is now hugely expensive, and its service business is under scrutiny from legislators. Both of these arguments are real and should be taken seriously, but human nature being what it is, we tend to land on one side or the other and then we downplay the other side. We create a straw man.

If one is on the side of buying he might say, “If we pay attention to valuation, then we will never own this stock and we will continue to miss out on its return.” On the surface that sounds like a decent argument, but it isn’t actually factual. It is a complete straw man. For most of the last decade Apple’s stock was cheap; it is only after this huge run that it has become expensive.

On the other side one might say, “This company has not innovated since Steve Jobs passed away. The growth is not sustainable and it is foolish to pay these valuations for a company that no longer innovates.” Once again, a straw man. Yes, the iPhone was created while Steve Jobs was still in charge, but the seamless Apple universe has been improved and its business has really changed from a hardware company to a service company.

It is easy to put words in others mouths and then defeat those words. Ultimately, what we are saying is the people who buy that other argument are stupid and we are smart. Well, not so fast.

In my world we get to find out. Ultimately, we have to choose what side we are on and then the market lets us know if we were correct or if it was those idiots with the feeble arguments who were correct. One does not last in the investing world if he doesn’t learn to take the other side seriously.

I wish this lesson could be learned in our politics. Nowhere do straw men exist in more prevalence than in politics. I believe it is the straw men that give us the perception of polarization. We continually exaggerate the positions of our opponents to make them ridiculous, and through the magic of our social media feedback loops, we begin to believe these straw men are actually real arguments.

Trigger warning: If any of our readers send these messages to their children who grew up with “safe spaces,” they might not want to read on. For those who wish to continue, I am not going to tell you what “side” you should be on, nor, contrary to your belief, am I going to reveal what “side” I am on. That is not our place. I am going to attempt to show how we might all start getting along a little better.

When the NBA re-started their season, the entire league wore Black Lives Matter shirts and took a knee for the national anthem. One player, Jonathan Isaac, did not. He did not wear the shirt and he stood during the anthem. After the game reporters asked him, “Do you not believe black lives matter?” For those who are not aware, Jonathan Isaac is black.

It is not my place to suggest what any of our readers should think about the Black Lives Matter movement, or Jonathan Isaac; it is to point out how ingrained the straw man has become in our society. The reporter who asked this sounded sincere. She made it sound as if she believes that if one does not support the organization named Black Lives Matter, then the only reason that could be is that he doesn’t believe black lives matter. This is a classic straw man. Mr. Isaac absolutely believes that black lives, including his own, matter. He has other reasons for his actions, and if you are interested you can look it up on Google.

Black Lives Matter is an organization and they have a platform. That platform, as laid out on their website, includes among other things, defunding the police and redefining the “western construct” of the nuclear family. Regardless of one’s view, these are certainly controversial positions. They may be correct, but certainly one could understand why someone would disagree. Many neighborhoods throughout the country, including mine, pay for extra police presence. Many Americans of all backgrounds still value the importance of family.

On the other hand, those athletes who take a knee are often booed. Those who boo say the act is disrespectful to the flag and the nation for which it stands. We all grew up pledging our allegiance to that flag every morning at school. The response from multiple kneelers has been, “They don’t understand.” This brings up our inability to effectively communicate, but that is another topic in and of itself. The point for today is that the people kneeling believe they are making a statement in favor of a real issue.

It is easy to just think “they” just hate minorities. It is easy to think “they” just hate America. It is hard to actually listen to the arguments of those with whom we disagree. My career in investing has taught me that if we want lasting success, we had better do away with those straw men and start taking the other side seriously. “They” might be right some of the time. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director