Does Corporate Memory Have A Role In Stockpicking?

Andreas Rosenau, 29 August 2012

In presentations about Prime Value we often talk about developing a “corporate memory”, from long experience in the market.

The traditional view of human memory is that it works similar to a storehouse of movies and records everything like a video camera onto our main server, the brain. But that’s not really how our brain works. The brain does not keep an accurate and complete record of every detail of events. Even if we are absolutely convinced that we recall an event or a person, someone else who shared the experience may recall it differently; our memory can produce errors.

We are sometimes bombarded with a vast quantity of data, which is not possible for a normal brain to handle, so we need to develop a process to sift through all the stuff and retain parts that actually matter. A lot of the data selection is done automatically or unconsciously through training and experience developed over the years. Humans are not really good at noticing and remembering details. Studies have shown that horses or cows are much better at noticing very subtle details (a very interesting study was done in 1905 claiming that a super horse can calculate numbers). Have you ever been a police lineup to identify a “bad guy”? About 20-25% of time a witness makes a choice that the police know is incorrect. Even if the witness is totally convinced about the “bad guy”, there is a high probability of error.

What does that mean for investment decisions?

Firstly, we need to refresh our “corporate memory” constantly, otherwise we risk our brain filling the gaps with too many other details. Therefore it is very useful to keep notes about meetings, investment decisions and so on to help us correctly remember the key facts.

Second is filtering out the key points. As we often do this unconsciously, it’s harder, but it is where time and experience comes to our advantage because we can train our brain to flow in a certain way. What are the key facts in a meeting with company management? Besides getting a repeat of the latest result figures, it’s actually more an understanding or feeling of how trustworthy and honest management is with shareholders. That’s a key fact where our timely observation is combined with experience, reflection of past events and comparisons to make a judgement.

Thirdly, how about the investment decisions to buy or sell a stock? Is this decision solely based on conscious decisions? Our brain unconsciously processes information, real facts and expectations, and combines facts from stock A with stock B in milliseconds. If you experienced bad losses in your share portfolio during the GFC, your brain is burned with this experience: Even if you want to see the positive upside in a stock, the GFC-led losses may still be working in the unconsciousness and make you seek less risky decisions.

It helps to be aware of the brain’s unconscious processes, that when we make conscious judgement about investment we process information parallel through our unconsciousness. Our experience as investors cannot be dismissed; no matter if we try and consciously focus on the key facts to make a decision.

If there was a clear-cut answer to how we balance the past and the present, conscious and unconscious, rationality and emotion to make the right decisions then we might all pick winners all of the time. But in reality the final investment decision is probably a mix of fundamental research and that elusive yet important “corporate memory”, mixed with a pinch of “gut feeling”.

Andreas Rosenau, ideas based on the book “Subliminal” by Leonard Mlodinow.