Becoming A Critical Thinker
As the Texas Lutheran University semester finished, I asked Diego about his plans after graduation. He said his whole life has focused on numbers and data. However, now he wanted to pursue a degree in philosophy.
Surprised, I asked why.
He said the K-12 educational system teaches clear, right and wrong answers. The curriculum is exact math, true or false questions or fill-in-the-blank with one correct answer.
Five times five equals twenty-five, water freezes at zero Celsius, and the human body has 206 bones. Those are facts.
This offers testing and grading precision.
As Diego gained greater wisdom in college, he recognized his pre-college curriculum left him hollow. He observed this mindset produced false precision in many disciplines. Diego wanted to think through ambiguous things that had no clear-cut answers. He was motivated by learning how to solve dilemmas without perfect answers.
Life’s most challenging issues are not black and white. Difficult questions rarely have obvious quantifiable answers that are one-size-fits-all. However, the K-12 educational system does not offer a substantive path for critical thinking beyond black and white.
Unfortunately, today’s media pushes the simple narrative even further. This is certainly true when discussing religion, politics, or business.
The investment world frequently plays into this narrative. Despite the precise math often used in the investment world, most answers are shades of gray. This is true when the investment community uses false precision to sell seductive investment products that appear to deliver guaranteed riches.
A simple example involves the math of stock market expectations. Since 1950 the average annual stock market return has been a very precise 11.1% per year. Does this mean the return is guaranteed each year and everyone should own stocks? Obviously, not.
Since 1980 the market has fallen from its annual peak by more than 14% in the average year. Despite this, the long-term averages still delivered positive returns in 75% of the calendar years. It is a bumpy short-term ride to earn the long-term average.
Furthermore, since 1950 the stock market has delivered single-year returns ranging from negative 39% to plus 47%. That range of outcomes is quite wide. Depending upon your tolerance for volatility and holding periods for an asset, stocks may be perfect for one person and inappropriate for others.
This discussion becomes significantly more complex if you ask harder questions. How do religion and business co-exist? What types of risk are you willing to take? If something is legal, but unethical will you do it if it produces positive returns? What is the impact of Artificial Intelligence upon society? What are the issues of our immigration policy if the U.S. is to maintain its competitiveness? What are the impacts upon business if the U.S. runs deficit budgets? What are the threats to Apple, or any other company?
The desire to be a better thinker is necessary as one evaluates more than just hard facts. You must wade through the gooey, messy aspects of psychology, philosophy and other elements that make life mysterious, interesting and maddening.
Considering this, here are some challenging, but worthwhile, questions to derive better investment outcomes.
There are two sides to every argument. The truth resides somewhere in the middle.
If you disagree with someone, be able to argue their position better than they can.
Know what delivers value to a business, beyond a ticker symbol. Know the good, the bad and the ugly of any business or industry.
Determine what the person on the other side of an investment knows which causes them to think differently. Ask the opposing person to share with you, “What don’t I know.”
Think through multiple outcomes. If wrong about an investment, what mistake will you make and what are the consequences?
Find investments so good that even if your thesis is wrong, it will still produce an acceptable return.
Identify a range of reasonable expected outcomes and respective time frames. Although average returns are important, rarely do investments produce an “average” return in any given year.
The more emotionally charged a topic, the more two people can have different answers and yet, each is acceptable for that person.
If you want to improve your investing and business skills, embrace your inner Diego. Think deeply and critically. The more complicated the question, the more the answer is “it depends.”
Dave Sather is a Certified Financial Planner and the CEO of the Sather Financial Group, a fee-only strategic planning and investment management firm.
(left to right: Diego Garcia, Esam Hijazi and Luis Green)