Different Makes a Difference

The Odlum Brown Research Blog

Learning to Draw Better

By Dan Hincks, CFA, Equity Analyst
Tuesday, April 28, 2015

Most of us aren’t very good at drawing. When we sketch a face, as Pixar Animation Studios’ co-founder, Ed Catmull, explains in his illuminating book Creativity, Inc. we typically draw the features dreadfully out of proportion, resembling no one. It’s because our brain places more importance on things such as the eyes and the mouth, the loci of communication, over other areas such as foreheads. As a result, we draw eyes and mouths too large and other features too small. So how is it that some drawers appear to be much more gifted? Simply put, they set aside their preconceptions. They draw the face as it is, not as our brain models it to be.

Just as preconceptions can turn a portrait sketch into abstract art, they can also lead to distorted investment decisions. Regrettably, we’ve been guilty of having biases that have caused us to miss opportunities. When Dollarama went public in 2009, we decided to pass due to a number of preconceptions: Retail is a difficult industry; IPOs are typically overheated and overpriced; and the Canadian retail landscape was (and is) fiercely competitive. We failed to appreciate the track record of Larry Rossy, one of Canada’s best retailers who built Dollarama from scratch to roughly 600 stores at the time. We overlooked the underpenetrated nature of the “value” retailing category in Canada. And, we ignored the potential for Dollarama’s purchasing power to increase with each additional store opening, reinforcing its scale advantages. Our error of omission has been costly. Since the IPO, Dollarama’s shares have done exceptionally well.

Last fall, we initiated coverage on Burger King (now Restaurant Brands International). While many investors had the preconception that it was a mature brand operating in a highly saturated (both in fats and market share) category, we saw an asset-light business model that was being run by, “some of the best businessmen in the world,” as noted by Warren Buffett. Our interest was further piqued when Burger King set its sights on Tim Hortons – a banner that could expand globally. We put our natural biases aside and so far, it has paid off. Fortunately, with this excellent and growing business, time is our friend.

There is nothing wrong with having natural biases when investing – keeping certain rules can prevent an investor from straying outside of his or her circle of competence. The key is to avoid placing too much emphasis on one piece of data while ignoring the bigger picture. Whether you are creating a portfolio of sketches or stocks, it’s best to set the preconceptions aside.

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