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The disadvantage of a mindset is that it can color and control our perception to the extent that an experienced specialist may be among the last to see what is really happening when events take a new and unexpected turn. When faced with a major paradigm shift, analysts who know the most about a subject have the most to unlearn. This seems to have happened before the reunification of Germany, for example. Some German specialists had to be prodded by their more generalist supervisors to accept the significance of the dramatic changes in progress toward reunification of East and West Germany.

– Richards Heuer

As a young analyst, I always started by looking for really cheap stocks, and after concluding they were indeed underpriced, I then tried to convince myself that neither the businesses nor managements were bad enough to offset the statistical cheapness.

Having completed all the valuation work before even meeting the maragement, you can guess how strongly biased I was to conclude that they were at least acceptable! Today, I encourage our analysts to reverse that process: Find businesses and managements they’d be excited to own and then do the wark to see if the valuation is attractive.

If it isn’t attractive now, monitor the stock price so you are prepared to act when it is more attractive. It is really amazing to see over the course of our holding period, typically five to seven years, how much value a great maragement can add that never was incorporated in our model, and conversely, how much value a bad management can destroy.

– Bill Nygren