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

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).


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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