Thursday, March 22, 2012

Verbal Reasoning in Investing

I like to talk about things that are overrated and underrated. For example, I've said that Security Analysis by Ben Graham is seriously overrated compared to Moyer's Distressed Debt Analysis.

I also think that quantitative ability is systematically overrated by most investment shops, relative to verbal reasoning. A Tom Brakke post made me think of this:

Many years ago, a leading light in the investment business wrote that one of the best predictors of investment success was how someone scored on the Miller Analogies Test. I have never taken the test or read research about it, but from my experience I agree with the provider’s assertion that the ability to understand analogies is “one of the best measures of verbal comprehension and analytical thinking.”

As does the reader of a novel, an investor seeks an apt and insightful analogy, not a worn or misplaced or stretched one. Of course, that’s true in most every human endeavor and economic decision making activity.
I think about analogies all the time. And I think the quants miss the forest for the trees. They can tell you to the penny what an MBS security is worth given a set of assumptions. But then they completely botch the assumptions, because they have no sense of history. What they come up with is falsely precise.


Stagflationary Mark said...

I linked to your post today.

I felt the need to do some verbal reasoning.

CP said...

That's true - you are very big on analogies and comparisons.

Stagflationary Mark said...


Here was one of my first comparisons. I offered it when the DJIA was 13,357.74.

September 1, 2007
The Sarcasm Report v.3

Gilligan's Island might seem like a fun, goofy way to run our country, but that's only because the music was so upbeat.

Our economy is temporarily back to being fun and goofy again. We're all trapped though. No way to get off this island, lol. Sigh.

It's just an opinion of course.