How To Build A Debiasing Strategy | The Acquirer's Multiple®

In his recent interview with Tobias, Drew Dickson of Albert Bridge discussed How To Build A Debiasing Strategy. Here’s an excerpt from the interview:

Drew: Whereas you can find winners and losers within the healthcare equipment space or within media or technology or industrials pretty easily. Easily, you can identify them, it’s going to be dispersion of returns and that gives you the chance to do stock picking.

We focus on those groups and try to gel it up to a portfolio or actually to a focus list for things that look really interesting and dynamic. Then, we start this debiasing process. Okay, what can we do to make sure we’re not being affected ourselves? We’re not immune, just because we know about behavioral finance, studied under Richard Thaler.

Danny Kahneman will say himself, “I came up with all these things, I still commit the same errors.” Just because you know about them, doesn’t mean you can prevent them. What can we do ourselves to insulate our emotions and recognize at least that we’re biased people, biased analysts, biased [unintelligible [00:23:13]? Well, we can write short cases on everything we want to buy, not just the one paragraph, “these are the rest of the long case but the deep dive short case and how are you going to make money on this thing on the short side.”

Then, I should say that backing things up when we launched Alpha Europe back in 2008, our main product was a long short fund. Then we were bought by Perella Weinberg in 2012. It pretty quickly launched a long only fund alongside it, and then as we spun off Perella’s platform to launch Albert Bridge back in 2016, it was a long only fund that we lead with, and but still bringing those long, short principles I think helps. If we can come in there and build– we call them shadow models or black sky models.

“Okay, here’s a business that we think’s got great ROICs, and they’re going to beat numbers and no one’s paying attention because this, this, and this.” “Okay, now flip yourself around and represent the defense, and tell me why this thing’s a dog and why it’s going to go lower and what’s going to happen.” It’s a great debiasing exercise, and then each of those that work for both long and the short work on each of these names become our constraints.

Okay, well, if we’re right about company X, Y, Z, or X, Y, Zed as you might say in Australia, or we would say in England. We can then say, okay, if we’re broadly right about what the stock will be worth, if we’re right, and if we’re broadly right about what the stock will be worth if we’re wrong, then we can start to develop this notion of risk and reward.

We can start to develop this notion of expected returns, and then we could ask ourselves, “Okay, well, how long is this going to take for the market to wake up to this thesis? Is it going to take a year? Is it going to take two years? How volatile is this thing naturally? We should penalize it, if it’s naturally more volatile.”

We could put all these things into a mix. Then, effectively, using a bit of Kelly criterion math come up with the right size we think these positions should be. Obviously, that’s going to be somewhat dependent on the expected returns of the other things that we’ve found that have gelled up. Then the goal for us is to basically get a 15-, 20-stock portfolio.