WTT: You Can't See Everything

The new documentary about Elizabeth Holmes and a candid conversation with a successful investment manager got me thinking about how we discover the truth. In this What Ted's Thinking, You Can't See Everything, I explore how the questions allocators ask can shape the answers they receive, and how our search for certainty can get in the way of understanding. Read Ted's blog here https://www.capitalallocators.com/teds-blog/?filterwp=31888&category_2=what-teds-thinking. Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:05Ted Seides?

  I curled up next to my wife in big, comfortable chairs at an AMC movie theater last weekend to watch the remarkable documentary, "You Can See Everything." I expected to learn more about Elizabeth Holmes. Instead, I left thinking about how we discover the truth. The documentary offers a broad perspective on how we consume and interpret information. Nate Fielder implicitly poses important questions. How do we form beliefs? What do we know? And as Mark Twain said, "What do we think we know that just ain't so?" The irony of the movie title is that the more access Fielder gained to Holmes, the more confused we become about the ground truth.

• 0:50Ted Seides?

  Sometimes, more information and more transparency do not lead to more insight. I left thinking more deeply about how we form perceptions and make decisions when the information in front of us is incomplete, biased, or wrong. The day before, I had a long conversation with a close friend who runs a highly successful public equity firm. He had just returned from a week abroad visiting clients amid a period of underperformance. Each client asked some version of the same questions. Why did you underperform? What will change your fortunes? And when will performance improve? He said to me, "It was all bullshit.

• 1:34Ted Seides?

  They know I don't know what will happen, but I have to perform to make them comfortable. It was exhausting and left me feeling empty." Behind closed doors, I got access to a truth that rarely gets unearthed in a typical manager-allocator conversation. I've been thinking about his comment ever since. Allocators make judgments about people. We visit their offices, meet their teams, dissect their portfolios, study their track records, and ask them to explain their investment process. We assume that more meetings, more access, and more questions lead to a better understanding of the manager.

• 2:15Ted Seides?

  But what if the process itself shapes the information we receive? Our biases influence the questions we ask. Our questions influence the answers managers give. And the conclusions we draw may tell us as much about the interaction as they do about how a manager actually invests. Turning back to my friend, when performance disappoints, our careful assessment of process often gives way to a much simpler judgment of outcomes. As a result, we lead managers to telling us what we want to hear rather than what they know. Think about the questions we ask when a manager underperforms. Why did it happen? What have you learned?

• 2:59Ted Seides?

  What will you do differently? And why should we expect better results? Taken at face value, these questions can carry an unreasonable expectation that a manager can explain the past with precision, identify what needs to change, and offer a positive outlook on an inherently uncertain future. This is particularly true in the public markets, where cause and effect carry a lot of noise on any individual position. There's another uncomfortable possibility. Maybe allocators don't always want the truth as much as they want reassurance. Managers recognize this and respond accordingly.

• 3:40Ted Seides?

  They emphasize their convictions, minimize their doubts, and present a plan. The result is a conversation in which both sides may leave feeling better without either having learned very much. My friend knew he couldn't predict when his performance would improve. His clients probably knew that, too. Yet everyone participated in the ritual. He offered explanations and a path forward. They listened, asked questions, and presumably left feeling a little bit better about staying invested. But did anyone leave the meeting with more insight? Perhaps there's more to these conversations than meets the eye. The questions asked when a manager underperforms may serve a purpose beyond their literal answers.

• 4:25Ted Seides?

  Astute allocators might focus less on what a manager says than on how they behave under pressure. Testing a manager's temperament, accountability, consistency, and conviction at difficult times can offer insight irrespective of the answers the managers give. In the repetitive exhaustion of what felt like playing defense, my friend may have missed the exception to the norm: an allocator playing the game within the game. "You can see everything" shows that seeing more doesn't necessarily mean understanding more. The lesson isn't to stop asking hard questions or doing the painstaking work of due diligence.

• 5:07Ted Seides?

  It's to recognize that the questions we ask can influence the answers we get. We might benefit from asking different questions to deepen our understanding of what's really happening. Questions like, "What don't you know? What would cause you to change your mind? Where might your process fail? And how do you distinguish between a mistake and an unfavorable outcome?" These questions reveal more about a manager's judgment, insights that can compound over time. We can't see everything. We can't know everything. And no matter how much work we do, we can't know what's going to happen with the motivations of everyone involved.

• 5:49Ted Seides?

  But we can get better at recognizing how our own expectations shape the answers we receive. Perhaps the best way to get closer to the truth isn't to demand more information and more certainty, but to make it easier for others to reveal their uncertainty. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium content. Have a good one, and see you next time.