The medical advice all value investors should follow

With medical students just as prone to behavioural biases as anybody else, a couple of pieces of advice doled out to budding doctors should be of interest to investors too



Andrew Lyddon
Fund Manager, Equity Value

“When you hear hoofbeats, think of horses not zebras.”

Although this may sound like a gently obscure piece of ancient wisdom, it is in fact an aphorism coined by a US professor of medicine in the late 1940s to hammer home an important point to his students.

In effect, then, it is a ‘razor’ – a philosophical principle or rule of thumb that helps you ‘shave off’ unlikely explanations for a phenomenon, or avoid unnecessary actions.

Razors (not the shaving kind)

We came across it recently, here on The Value Perspective, when we were discussing other such razors, including the most well-known, Occam’s, which holds that simpler solutions are more likely to be correct than complex ones, and Hanlon’s, which seems grimly appropriate in the current climate of heated political debate – ‘Never attribute to malice that which can be adequately explained by stupidity’.

The hoofbeats phrase was coined because, when faced with certain symptoms in a patient, medical students will often instinctively diagnose something exotic because it has lodged in their brains, as opposed to a statistically more probable cause.

One example of this, apparently, is the way necrotic skin lesions in the US are often attributed to the bite of a particular spider – even in areas where that spider does not even live.

Here on The Value Perspective, this tickled us – the hoofbeats, not the necrotic lesions and poisonous spiders – because, of course, this puts us firmly in the realm of behavioural science.

The aphorism is a warning to medical students against the dangers of a kind of recency bias – also known as the availability heuristic – whereby human beings tend to ascribe heightened significance to certain events.

Beware your own biases

The difference here is, while investors who give a disproportionate amount of weight to more recent events risk losing money, the doctors who give a disproportionate amount of weight to more memorable, if less probable, medical facts risk losing time and so, perhaps, their patient.

Incidentally, it seems the Romans had their own take on this idea in the context of rhetoric: “The striking and the novel stay longer in the mind.”

Anyway, having been drawn in by the sound of hoofbeats, we decided to stay on this particular Google path to see what other medical aphorisms might have some connection with the world of investing.

Soon enough, we came across Sutton’s Law.

Named after Willie Sutton – who, asked why he robbed banks, is said to have replied “That’s where the money is” – it is the principle of going straight to the most likely diagnosis.

That struck a chord with us, here on The Value Perspective, because the first stage of our investment process is to go straight to what we believe is the most like source of outperformance.

Put simply, there is now approaching a century and a half of historical data to show that buying good businesses for less than their intrinsic value will, on average and over time, yield above-average returns (past performance is not a guide to future performance, of course).

Subscribe to our Insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.


Andrew Lyddon
Fund Manager, Equity Value


Behavioural finance
The Value Perspective
Follow us

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This marketing material is for professional clients or advisers only. This site is not suitable for retail clients.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.