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Why Investors Need to Think More Like Sherlock Holmes

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Last night I was looking for a book that I could read before bed that wouldn’t keep me up all night thinking. I was specifically looking for a nice, easy-to-read fiction book that would help offset the non-fiction/investing/business-related books I normally tend to read.

So I picked up The Adventures of Sherlock Holmes by Sir Arthur Conan Doyle off my bookshelf.

I don’t know if this is a coincidence, or if my brain just subconsciously works to relate everything I read back to investing and how to make smart decisions, but the very first page of the book opened with a preface giving a description of Sherlock Holmes – a description that could just as well have described Ben Graham, Warren Buffett, Charlie Munger, or any of the other great value investors.

So of course the book had the opposite effect of what I was looking for and I stayed up another hour reading and thinking about how Sherlock Holmes could’ve been a great value investor if he had wanted to be. Anyways…

I pulled out some passages about Sherlock Holmes from what I read last night that I really think fit the mental attitude that value investors should have.

Invest Based on Facts and Arithmetic, Not on Guesswork and Optimism

“To trace the evolution of the character and his career one must first understand the character of Arthur Conan Doyle. When he was a young doctor, Doyle was fascinated by empirical facts and their dependability; it was the sense of the dependability of physical evidence found in his stories that helped seduce their first English audience.”

“…Doyle intended for Holmes to be terse, methodical, and dependent upon reason and logic…”

Back in the 1930’s, Benjamin Graham was essentially the first investor to say that investing should be based on facts and calculations using solid numbers, rather than on speculation about the future prospects of a company or the future movements of its stock price. According to Ben Graham, “An investor is neither right or wrong because others agree or disagree with him; he is right because his facts and analysis are right.”

The Importance of Keeping Things Simple in a Complex World

“[Sherlock Holmes] had been modeled on one of Doyle’s medical professors, Dr. Joseph Bell. Doyle greatly admired his tutor for his great intelligence and for his incredible sense of logic. It would seem that his teacher was gifted in explaining difficult problems so clearly that they seemed ‘elementary.’ This goes a long way in explaining the teacher-student relationship between Sherlock and his almost equally famous companion Dr. John Watson.”

This reminds me of Warren Buffett, who is so good at breaking down complex financial and investing topics and giving simple explanations for them.

In “A Scandal in Bohemia,” Sherlock hasn’t seen Watson for several months. But when Watson comes to visit him, Sherlock is able to deduce that Watson had started practicing medicine again, that he had gotten caught in the rain the previous Thursday, that his housemaid is clumsy, and that he has gained 7 pounds. He then explains to Watson how he reached those conclusions:

“I could not help laughing at the ease with which you give your reasons,’ I remarked, ‘the thing always appears to me to be so ridiculously simple that I could easily do it myself, though at each successive instance of your reasoning I am baffled until you explain your process. And yet I believe that my eyes are as good as yours.’

‘Quite so,’ he answered… ‘You see, but you do not observe. The distinction is clear.’

Charlie Munger says that investing should be more simple than it is complex – although it might actually be harder mentally to keep things simple.

An Investor’s Worst Enemy is Himself

“In Holmes’ encounter with Miss Mary Sutherland, he demonstrates the clarity that reason can lend his thinking. He does not let emotions, assumptions, or judgments stand between him and a mystery. He simply examines what is before him, and that is all he needs to find his answer. For the reader who identifies with Dr. Watson, Holmes represents stability. He is as reliable as the facts upon which he depends. He is unflappable, and his work is pure science.

Perhaps the most fascinating thing about Holmes though, is not his stringent logic but his lack of other, more human characteristics. As one reads this book, the notion that Sherlock Holmes is like a computer is never far from consciousness.”

A little later in “A Scandal in Bohemia,” Sherlock has received a mysterious letter and shows it to Watson:

‘This is indeed a mystery,’ I remarked. ‘What do you imagine that it means?’

I have no data yet. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.

Theorizing before you have data, and then twisting facts to suit theories is confirmation bias. I’ve talked about heuristics and biases several times before (see The Ultimate List of Cognitive biases, 6 Cognitive Biases Investors Should Know, and 9 Cognitive Biases You Need to Know to Master Your Money) and how they can influence your decision making when investing and in business (read Thinking, Fast and Slow, The Undoing Project, Influence, and Methods of Persuasion for more on this topic).

Become a Learning Machine; Go to Bed Smarter Than When You Woke Up

“Sir Arthur Conan Doyle’s famous creation, the Sherlock Holmes mysteries, is indeed the product of a meticulous mind. Doyle’s plots are a matter of clear cause and effect… Holmes never falters because he relies on being able to learn everything he needs to know. No knowledge is barred from him; rather, one need only discover which approach to take to ferret it out.

Warren Buffett and Charlie Munger are learning machines. See The 10 Best Charlie Munger Quotes, The Secret behind Charlie Munger’s Success, and Warren Buffett’s and Charlie Munger’s Top 7 Tips for the Class of 2016.

Sherlock Holmes: The Complete Novels and Stories

by Sir Arthur Conan Doyle

Since his first appearance in Beeton’s Christmas Annual in 1887, Sir Arthur Conan Doyle’s Sherlock Holmes has been one of the most beloved fictional characters ever created. Now, in two paperback volumes, Bantam presents all fifty-six short stories and four novels featuring Conan Doyle’s classic hero–a truly complete collection of Sherlock Holmes’s adventures in crime!

Image result for sherlock bbc poster

Sherlock (TV Show)

starring Benedict Cumberbatch and Martin Freeman

In this contemporary version of Sir Arthur Conan Doyle’s detective stories, Dr. John Watson is a war vet just home from Afghanistan. He meets the brilliant but eccentric Holmes when the latter, who serves as a consultant to Scotland Yard, advertises for a flatmate. Almost as soon as Watson moves into the Baker Street flat, they are embroiled in mysteries, and Sherlock’s nemesis, Moriarty, appears to have a hand in the crimes.

Sherlock Holmes (2009 Movie)

starring Robert Downey Jr. and Jude Law

Revealing fighting skills as lethal as his legendary intellect, Holmes will battle as never before to bring down a new nemesis and unravel a deadly plot that could destroy the country.