July 2014
Volume 7, Issue 7

In This Issue
How to Debunk 35 Years of High School Myths

About Us

Founded in 1995, Daruma Capital Management invests in high-conviction portfolios of no more than 35 stocks.

Our annualized Small-Cap return net of fees is 13.21% vs. 9.02% for the Russell 2000 since inception (7/28/95 to 6/30/14).

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The problem with myths is that they're sticky - they are compelling, easy to remember and often repeated. 

In today's newsletter, I highlight three key insights from "The Debunking Handbook," and explain how these can prevent misinformation from doing harm in the world.     
(To listen to this month's newsletter, click here.)
signature - Mariko 
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Capital Management LLC 
articleOne How to Debunk 35 Years of High School Myths

One of the unintended benefits of middle age is finally getting over high school, something I discovered at my 35th reunion in Hawai'i last month.

For me, the most painful part of high school was having to catch the 6 a.m. bus every morning - I commuted over an hour each way from the "wrong side of the island" and didn't learn to drive until college.

My geographic isolation, together with the fact that unlike many of my Punahou classmates I wasn't a "lifer" (there since kindergarten), filled me with misinformation about what made my classmates tick. This reunion (my first) shattered quite a few myths.

Even the mean girls were civil. Maybe because our identity is now based on actual experience and choices made; maybe because the closer we near death the less we care what other people think; or maybe it's the result of being with others who knew us back when we were nothing but unrealized potential. Whatever the reason, I found my classmates to be surprisingly real in our conversations.

Whether it was the fleeting moments of candor, the glimpses of shared pain, or witnessing the high school equivalent of the lion laying down with the lamb (former football star chatting with former geek), my faith in humanity was renewed.

All of this myth-busting got me thinking about how much we, as humans, need help in seeing the facts for what they are. More specifically, it reminded me of "The Debunking Handbook," by John Cook and Stephan Lewandowsky, a guide developed for scientists fighting climate deniers and something I have been emailing to friends and colleagues for many months now.

The Debunking Handbook has also become my go-to manual in offering advice to investors, company managements and stockpickers alike, all of whom need to debunk myths as part of their day jobs.

The problem with myths is that they're sticky - they are compelling, easy to remember and often repeated. And, according to the handbook, "Unless great care is taken, any effort to debunk misinformation can inadvertently reinforce the very myths one seeks to correct."

Apparently, in order to give truth a fighting chance, one needs to:
  1. Focus on the facts, not the myth itself.

    Familiarity increases the chances that people will believe something is true (that's why advertising works). So people will remember the wrong information they heard a thousand times before they remember the mental tag of "not true" that they heard once attached to that factoid.

    So don't lead with or headline the myth - lead with the contradicting fact you want people to remember, and bury the myth itself deeper in your argument.
  1. Provide explicit warnings that misinformation follows, prior to discussing a myth. 

    Remember that people, when presented with a balanced view of the facts, gravitate towards information they already agree with; the more strongly held the view, the greater the polarization. Arguing with them just ends up reinforcing their views.

    Instead, a more effective approach - and prior to discussing the myth - is to warn people that misinformation is coming. Tell them that the upcoming information is false; explain the biases of those who perpetuate it; highlight the way in which the information is misrepresented and how they are being misled.

    So if you're a sell-sider or analyst holding a non-consensus opinion and trying to convince a portfolio manager to buy a stock, or a management trying to shake an unfair characterization in the market, explain first why the information out there is wrong or biased.
  1. Propose an alternative explanation to the myth in question.

    Strongly held, preconceived ideas of how a company or stock works, for example, become embedded into a mental model - refuting that myth creates a void that needs to be quickly filled with another explanation. We don't like gaps in our mental models - it makes us feel squirrelly.

    But, "for the alternative to be accepted, it must be plausible and explain all observed features of the event."
Oh, and one last important tip from our friends: Good graphics are the way to go. When people read a refutation that conflicts with their beliefs, they seize on ambiguities to construct an alternative interpretation. "Graphics provide more clarity and less opportunity for misinterpretation."

Applying the principles above will renew your faith in human nature and prevent a lot of misinformation from doing harm into the world - you will become a lean, mean, debunking machine. Maybe you'll even consider attending that next high school reunion!

© 2014 Daruma Capital Management LLC

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