Most investors know that it's important to think critically when buying or selling a stock. But what exactly does this mean?
The Motley Fool's Gaby Lapera and contributor John Maxfield delve into this question in this segment of Industry Focus: Financials. More specifically, they discuss the importance of clearly identifying the issue or question that needs to be answered before beginning your decision-making process.
A full transcript follows the video.
This podcast was recorded on Sept. 21, 2016.
Gaby Lapera: This definitely gets into our next topic on the issue, which is how to get started with critical thinking. The first, most important, most basic step is: Ask a question. It can't be any old question, and you can't just ask it any old way. There's this pragmatist philosopher whose name was John Dewey, and he said, "A problem well put is half-solved." That means, when you ask a question, it should be very clear what you're asking. Otherwise, you'll have no idea when you find the answer.
John Maxfield: Yeah. Identifying the issue and asking the right question is so important. How I think about it is: If you shoot a rocket, if it's tilted 2 inches one way, you may not be able to see that difference when the rocket is on the launch pad. But the further and further it goes into space, the more off the original trajectory that original error can make it go. So, identifying the appropriate question, to your point, it's such a critical piece of this.
Lapera: Yes. Ways to know that you're asking a good question is that your question needs to be specific. If it's too broad, it sometimes becomes very difficult to find data to help you understand what you're looking for. And honestly, most really big questions are just a whole set of smaller questions that pile up together to create this huge, overwhelming question that you're trying to answer. If you can, start with the smaller questions and answer all of those, and build and build until you can answer a big question.
And the other thing I think is really important to realize is, it's OK to restate your question. Maybe once you start doing your research, you realize the question you started out with isn't actually the one you were trying to answer. That's OK. If there's one thing you take away from this podcast, it's that it's really important to ask questions of everything, including yourself.
Maxfield: Yeah. Your point about being precise, when you said that, it reminded me of this research by a guy named Philip Tetlock who studies forecasting, and the difference between people who are really good at forecasting and people who are really bad at forecasting. And one of the things that he found -- and he's written a number of books on this, he's really the leading authority on forecasting in the United States, maybe even in the world -- one of the things he found in his research was that the people who were better and produced more accurate forecasts were more precise in all aspects of their thinking.
Lapera: Which makes sense.
Maxfield: Yeah, right? It makes total sense. The tangible example that he gave in his most recent book, Superforecasting, is that when you're asked a question like, "Oh, Gaby, what's the percentage possibility that interest rates will be 2% next year?" And let's say somebody gives 90%, another person gives 80%, but then there's other people who say 71% or 77% or 86%. The more precise those estimates are, and the more precise you think, there is a direct correlation to the quality of the output of your decision-making process.