Straw vs. Steel: Which do you think is the better strategy in investing?

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Happy mid-week, everyone! Welcome to “The Independent Investor!” Every Wednesday, we talk about various investing tips and coaching comments that can help grow your investment portfolio. Applying these tips will enable you to enhance not only your financial decision-making but also other aspects of your career and personal life. Today, we’ll discuss an interesting life-and-investing hack based on the experiences of one of the greatest investors in the world. Continue reading to know why you should sharpen your investing skills with steel, NOT straw. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Straw vs. Steel: Which do you think is the better strategy in investing? In a past “The Independent Investor” article, we talked about the “confirmation bias” and how it can affect your investing strategies. We also explained one of the ways to combat this bias is to use the scientific method, which includes testing your hypothesis by trying to prove yourself wrong. This is because by playing “devil’s advocate” with your own beliefs, you exercise true objectivity and are able to look at both sides of a story or situation. Today, we’ll focus on a similar topic in the context of investing. We’ll also discuss how this principle is applicable to other areas of your life, such as when you’re negotiating with others, representing the debate team in your class, etc. The “Straw Man” vs. The “Steel Man” Investing legend Peter Thiel has been known as a “master negotiator” for over 2 decades. In fact, his greatest negotiation hits are some of the “marvels” of the investment world! Let’s take a look at some of his achievements in the fields of business and investing… In the late 1990s and early 2000s, he and his partners—sometimes referred to as “mafia” for their exceptional negotiating skills and strategies—built PayPal into one of the first successful digital-payment platforms. After serving as the company’s CEO from 1998 to 2002, Thiel sold the business for USD 1.5 billion to e-commerce giant eBay for top dollar amid the dot-com bubble. [Dot-com Bubble: This refers to a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.] In 2003, Thiel founded big-data analytics company Palantir Technologies and successfully negotiated contract after contract with the U.S. government and its allies. Today, Palantir is a USD 17 billion company, and Thiel owns a 7% stake in it. In 2004, he picked up a 10.2% stake in Facebook for USD 500,000. He then sold most of that stake 8 years later when it was worth over USD 1 billion. What else? In 2005, he launched venture-capital firm Founders Fund, which backed companies like Airbnb, LinkedIn, SpaceX, and Stripe before they took off. Thiel’s negotiating skills with these companies have made billions of dollars for his firm’s investors. Being a “master negotiator” played a significant role in Thiel’s personal life too. In 2016, he almost single-handedly sunk the gossip website Gawker after it produced stories about his private life. The Gawker lawsuit is quite a fascinating case. Long story short, Thiel sponsored numerous lawsuits against the website, including one from American professional wrestler Hulk Hogan. As a result, Gawker was fined USD 140 million and later on, it filed for bankruptcy. What do all these stories tell? Thiel has had a HUGE impact on the investing world… and the world at large. No wonder he’s known as a “master negotiator!” In fact, those who know him personally attributed his success to many of his strong traits and skills. One of these traits and skills? His commitment to the technique called “Steel Man”… The “Steel Man” is the practice of making an argument stronger by understanding the other side’s argument and then engaging with it. The idea is to patch up weaknesses in the opposing side’s proposition to bring the best counterargument for it. This means when Thiel debates a big-picture investing idea, a business strategy, or a transaction, he absorbs his opponent’s most logical, relevant points. This helps him create the best possible counterargument. Did you know that the opposite of “Steel Man” is the “Straw Man?” The latter is often used when people want to win an argument but don’t have sufficient facts. So, instead of attacking their opponent’s main points, they’ll misrepresent the argument. One real-life example of the “Straw Man” argument is the 2019 Australian federal election debate, where the Australian Labor Party (ALP) proposed that within 10 years, all vehicles should be electric. The ruling coalition government responded by accusing the ALP of declaring “war on the weekend.” According to them, the ALP was trying to ruin the ability of families to take long weekend driving trips. Clearly, we can see here that the Australian government created a “Straw Man” argument. Instead of debating the merits of electric vehicles (EVs), the ruling party made the ALP declare its stance on Australians taking vacations. The problem with a “Straw Man” argument is it never actually gets to the root of a debate; it just shifts the focus… and even if the technique works, one still won’t win the debate at hand. Eventually, the opponent will catch on and bring the real issue back into focus. Let’s try using the “Steel Man” technique in the Australian federal election debate example… By applying this strategy, the coalition government could’ve had a good-faith debate with the ALP on the merits of an EV initiative. The representatives of the ruling party would have asked questions like: “Why should we want to make all cars EVs?” “What are our real goals to help improve the environment and emissions?” “When do we need to reach these goals?” This technique might sound counterintuitive at first, but by asking such questions, the coalition government would have better understood the argument’s underpinnings, making it easier to understand where the disagreement lies and come to a middle ground. The “Steel Man” Mentality is an Also an Essential Tool for Investors. Great investors are constantly thinking about everything that can go right in a stock. However, the best ones are those who also consider what could go wrong. As author F. Scott Fitzgerald said: “The test of first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” How does this concept apply to investing? When you buy a stock—and for as long as you own it—it's not enough to just focus on why you think it's a good opportunity. You should also consider why you shouldn't own that stock. Never dismiss those counterarguments with a wave of the hand. Do your best to make the strongest possible argument against this investment, and use the “Steel Man” strategy to try to prove yourself wrong. Assuming you’ve done that and you still have the same conviction in your original idea, that’s when you know you’re truly making the RIGHT decision in your investments. Keep this technique in mind when making decisions about your finances and investments! Sharpen your investing skills with steel, NOT straw. Through this, you’re training yourself to be wise not just in knowing where to put your money, but also in ensuring you’re doing the right thing in other areas of your life. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! Are you familiar with “Billions,” the American TV series that runs from January 2016 up to the present? Learn more about why investors should be great listeners in next week’s article!