Tuesday, June 7, 2022

Know the counter-argument for any investment

“He who knows only his own side of the case, knows little of that.” 

— John Stuart Mill 

"I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do." 

- Charlie Munger 

"Ignorance more frequently begets confidence than does knowledge."

- Charles Darwin

If you want to understand your position in any argument, learn what is the counter-argument. Whether associated with investing or current events, serious knowledge of the alternative will only help you refine your position. Describing pros and cons of any investment is a critical skill, yet it is harder than most think. Of course, it is easy to detail the arguments that support a position, and then the counter-arguments become a perfunctory process with minimum effort. A counter-argument cannot be the mirror opposite of an existing position, nor can it be a straw man that can be easily defeated. A good counter-argument should have the potential to be persuasive.

For example, someone could argue that the Fed is going to follow a hawkish policy because inflation is going higher given continued supply congestion and oil price increases. The counter-argument cannot just be that oil prices and bottlenecks will be reversed. The process of why must be detailed and given specificity. 

The counterargument issue becomes especially difficult when developing quant models. There is no counterargument except through breaking the model, running alternative scenarios, or having another model to contrast against the primary model. There is a reason for why ensemble modeling is used to solve the counterargument problem. What do alternative models say about output?

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