SIMON BROWN: A preponderance of evidence

One of my favourite terms for investment is “preponderance of evidence”. This is actually a legal term. In a criminal trial there needs to be evidence beyond a reasonable doubt, whereas in a civil trial evidence only needs to meet the benchmark of preponderance of evidence. 

In other words, while not 100% certain, the data stacks up on one side, leading to the preponderance of evidence. 

This is an important element for an investor when it comes to deciding to invest (or trade) in a particular stock or product. We will not find “beyond a reasonable doubt”, as that implies certainty, and we can never be certain of an investment or trade. 

(As an aside this is a great check for whether an offering is a scam: if they promise certainty of return, run, as that is simply not possible).

But back to my preponderance of evidence. When deciding about an investment we’re naturally doing research on the stock and stacking up what is in favour of buying and what is not. 

We’ll never have everything on one side or the other, but if we do find a preponderance of evidence then I am happy to act. 

Now, make sure your research is true and not suffering from confirmation bias, where we only search out data that confirms our existing view. We need to make sure we actively hunt out opposing views. I remember way back in the day when Tongaat was around R140 and I was holding and in profit. But I was worried that everybody agreed it was a great investment with significant potential returns. I struggled to find opposing views so I tracked down an analyst who had a sell rating on the stock and gave him a call. 

He did not change my mind but it was important to get a different perspective, and in the interest of disclosure his assessment was eventually spot on and I exited the position at breakeven. 

What also really matters when searching for your preponderance of evidence is process. I have a fairly rigid research process which I document the entire way. The reason is simple: the process ensures that my investment success is repeatable. If I researched every stock differently then I am really just indicating bias and can mould the outcome to whatever I want it to say. 

By using a process I have a level of confidence (after decades of the process) in my research abilities. 

Sure, I get it wrong often enough, but that’s why it is a preponderance of evidence and not a certainty. 

Lastly, because I document my process every time, I am also able to revisit an individual process for a stock that either worked out great or horrid. This helps me refine my methods.

But a word of caution: don’t make wholesale changes because of one winner or loser. Changes to the process should be infrequent and small.