In 2009 author Chimamanda Adichie coined the term “single story.” A native of Nigeria, Adichie first came to the U.S. to attend college. Almost immediately, she was struck by the one-dimensional lens through which many saw her. It started with her roommate.
Knowing that Adichie had just arrived in this country, her roommate, an American, asked how she was able to speak English so well. Adichie had to explain that English is Nigeria’s official language. Her roommate was further surprised when Adichie chose to listen to the music of Mariah Carey. Her roommate had expected her to prefer, as she put it, “tribal music.” In short, Adichie says, her roommate was making the mistake of operating with a single story.
This sort of thing is common and can trip up investors too. Faced with a complicated world, our minds naturally try to cut through the noise by looking for patterns. As a result, we develop short-hand stories to quickly characterize investments and put them in mental boxes. Growing companies, for example, are “going to the moon” while struggling companies are “doomed to failure.” Some markets are “the future” while others are “disasters.” Simple stories are very binary.
When we over-simplify like this, however, we run two risks—false positives and false negatives—both of which can be costly. With false positives, the single story focuses on everything that’s attractive about an investment while dismissing all of its risk factors. With false negatives, we do the opposite, writing off an investment as a dud without giving consideration to anything that’s positive.
In today’s market, the risk of single stories seems particularly high. That’s because markets are in the middle of what some have called an “everything rally.” Everything seems to be going up—growth stocks, value stocks, IPOs, SPACs, cryptocurrencies—even trading cards.
A few weeks ago, the focus was on GameStop. But that was January’s story. Now other “shiny object” assets are going up. Consider the latest: dogecoin.
According to one of its creators, doge wasn’t intended as an investment; it was initially created as a joke. But recently it has gained traction, rising about 12-fold in value in the first six weeks of the year. Adding to doge’s popularity: an endorsement from Elon Musk, who recently became the world’s wealthiest person after the value of his own company rose 700% last year. It’s beginning to feel a little bit like a hall of mirrors.
Of course, an everything rally can’t go on forever. It stands to reason that eventually some of these inflated asset prices will return to Earth, just as we saw with GameStop. Still, many others will continue to prosper. So how can you tell the difference? These kinds of highflying investments are like a Rorschach test—with their value in the eye of the beholder. That makes them unusually susceptible to single stories.
The solution? Work to gather the full story behind a prospective investment. Here’s the five-part framework I recommend:
1. Consider the obvious merits. This is the easiest aspect of an investment to evaluate. If you’re looking at a company’s stock, these might include a unique product, increasing market share or a talented management team. This step is the simplest of the five because you need only look at the company’s current earnings and estimate how likely it is to continue delivering those results.
2. Consider the obvious risks. As a starting point, recognize that each type of investment carries its own set of risks. For a technology stock, obvious risks might include signs of market saturation or a new competitor. For an energy company, an obvious risk would be low oil prices like we’ve seen in recent years. In the world of bonds, the big fear today is that interest rates might rise, perhaps significantly, if the government passes an outsized stimulus package. As in Step 1, you can’t perfectly predict or quantify any of this. The main idea, though, is to force yourself to think about the risks.
3. Consider what opportunities might lie below the surface. In this step, you want to go beyond the information that’s plainly visible. For example, if you’re looking at a consumer products company, ask yourself if they might be working on a new product line. Consider Apple, for example. Before it introduced the iPhone, no one knew it was coming, and it wasn’t factored into the share price. In the world of bonds, there are opportunities too: Interest rates could drop unexpectedly, as they did last year. Or a slowdown in the stock market could cause a rally in bonds. The reality is that there is an infinite set of things that could happen, but there’s no need to conceive of every possible outcome. The objective here is just to recognize that there might be—and often is—more than meets the eye with an investment.
4. Consider what risks might be lurking below the surface. Suppose you’re looking at an investment, and it looks great. Again, Apple is a good example. What could go wrong? The late Harvard professor Clayton Christensen argued that the biggest risk for successful companies is what he called the “innovator’s dilemma.” That is, companies become so focused on doing what they do well that they get caught flatfooted when a new competitor delivers a better mousetrap. As you think about risks, keep this in mind. An investment that looks perfect only looks that way because you can’t see what’s below the surface.
5. Keep in mind that, in most cases, investments aren’t necessarily “good” or “bad.” An investment that’s good for someone else might not be appropriate for you. So be especially wary of other people’s single stories.
A final note: as you evaluate an investment’s positives and negatives, be aware of the natural human tendency to put disproportionate weight on the negative over the positive. Psychologist Roy Baumeister summed it up well in a 2001 study: “Bad impressions and bad stereotypes are quicker to form and more resistant to disconfirmation than good ones.” So, as you consider both sides of a potential investment, try to correct for the fact that you will inevitably find it easier to scare yourself out of an investment than to talk yourself into it.
Always keep in mind the danger of the single story. In my view, you give yourself the best chance for success when you keep your eyes—and your mind—open. Consider what you can see as well as what might be around the corner.