STREET DOGS

From Bill Nygren at Oakmark Funds:

In the book Range: Why Generalists Triumph in a Specialist World, author David Epstein argues that many fields have gone so overboard with specialisation that generalists are now the more valuable problem solvers. Epstein states that “highly credentialed experts can become so narrow-minded that they actually get worse with experience, even while becoming more confident a dangerous combination”. Through numerous examples, Epstein differentiates between “kind” and “wicked” environments. He says a “kind” learning environment is defined by psychologist Robin Hogarth as one where “patterns repeat over and over, and feedback is extremely accurate and usually very rapid”. Specialists can thrive in “kind” environments. As a simplistic example, learning to play tic-tactoe is the epitome of a kind environment.

Unfortunately, most of life occurs in less kind learning environments. Hogarth calls the opposite of a kind environment “wicked.” As Epstein says, “In wicked domains the rules of the game are often unclear or incomplete, there may or may not be repetitive patterns, they may not be obvious, and feedback is often delayed, inaccurate, or both.” On the continuum between kind and wicked environments, investing seems to be much closer to the wicked end.

Bad news for a company typically pushes its stock price down, but when the news has already been thoroughly discounted, the announcement can actually make the stock price go up. We can buy a stock that looks unbelievably cheap and the stock price drops even lower. Becoming successful at investing has little in common with becoming successful at tic-tactoe. The learning environments are about as different as they could be.