Mr Gray argues that fund managers need to avoid the phenomenon of ‘groupthink’, where decisions are formed by a consensus of opinion lacking critical reasoning or an evaluation of alternatives.
“When a stock is surging, investors flock to it, expecting essentially ever-more unrealistic gains, seeking out information that backs up what they already believe, and ignoring information that is contrary to their view,” Mr Gray explained.
He said that if company information is incomplete and managers fail to question decisions or process information in a biased manner, opportunities may be missed.
“While no one would deny that a collaborative team-based approach to investment decisions has much to recommend it, and is generally thought to be the backbone of a robust investment process, by the same token, a lack of conflict is rarely the sign of a well-functioning decision process,” he said.
In order to combat the biases in group decision making, Mr Gray recommends implementing processes that encourage members of the investment team to play a devil’s advocate role.
“Investment team members [at Hyperion] are expected to express an opinion during formal team meetings, and are actively encouraged to put forward a view contrary to the team consensus,” he said.
According to Mr Gray, this ensures entrenched views are questioned, improving the team’s understanding of the company’s overall competitive advantage and its growth prospects.
The purchase of any stocks at Hyperion must have approval by a senior investment team member and only one investment team member has to challenge and veto a stock in order for it to be excluded.
Mr Gray says this means each individual member has researched every company and develops their own independent view on the company’s investment worthiness.
He claims that effective decision making is about establishing a balance between diversity and convergence.
“A clear set of responsibilities for investment team members and a defined and documented decision-making process goes a long way in extracting the best investment decisions within a close-knit, high pressure team environment,” said Mr Gray.
