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Ideology + Investing = A Recipe for Disaster
Posted by: The Science of Hitting (IP Logged)
Date: June 29, 2012 09:03AM

Today’s healthcare ruling has certainly got the talking heads going; the worst part of it all is that there are months and months of this still to come. I thought I would take the time to bring the political conversation back to what I really care about: great companies and investing. I thought I would take the time to scratch out an article dedicated to the crazies of the world: here’s a list of why most political diehards (on both sides) are likely to be poor investors:

1) They Always Think They’re Right – Anytime that I listen to a political talk show, it’s always the same thing: “Here’s why I’m right and you’re wrong” (I'm paraphrasing). While that may work for winning political debates, it doesn’t work in investing; intelligent investors must always be cognizant of the fact that there is always somebody on the other side of a trade – and if you can't identify why they could possibly be selling why you're buying, there’s a good chance that you’re in for some unwanted surprises down the road.

2) They Have an Opinion on Everything – I’ve discussed this phenomenon before, and think that it applies to many investors as well; last year, it seemed like every person I spoke with had an opinion on Bank of America (BAC) common stock, despite the fact that many of those people wouldn't understand half of what they were reading if they flipped through the 10-K.

In politics, hearing someone say “I don’t know” is quite uncommon; on the other hand, Warren Buffett and Charlie Munger (BRK.B) have noted in the past that they have a “too hard” pile – and have no qualms about adding a potential investment to that list.The intelligent investors gladly identifies that which is beyond their circle of competence, and instead focuses on what will be worth their time and effort (as Bill Ackman likes to say, there must be an appropriate “Return on Invested Brain Damage”).

3) They Hate Hearing the Other Side of the Argument – This goes along with point No. 1; political diehards always want to be heard, but aren’t too fond of listening (I guess the thinking is that the other guy can’t be right if you don’t let him talk). This reminds me of David Einhorn (with Allied Capital) and Bill Ackman (with MBIA) – people would attack them personally simply so they could sleep well at night without actually having to consider that the shorts might just be correct. In the world of investing, this is essentially suicide; in addition to poisoning your current holdings, blatant disregard for intellectual growth is a surefire way to make sure you never improve as an investor.

In a May 2007 speech at USC, Charlie Munger said the following about ideology:

“Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind; you’ve seen that, and you see it a lot with T.V. preachers, for instance – they’ve all got different ideas about theology and a lot of them have minds that are made of cabbage. But that can also happen with political ideology, and when you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very, very careful of this ideology. It’s a big danger… I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another and that is: I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who support it. I think only when I’ve reached that state I am qualified to speak. This business of not drifting into extreme ideology is a very, very important thing in life.”

Charlie’s statement is extremely important; while this is less relevant to investing than it is in politics or religion, it still creeps in at times. As an investor, you must be objective – if you do not willingly search out differing points of view from your own in an attempt to create a bullet-proof investment thesis, you are setting yourself up for financial disaster.



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Re Ideology Investing A Recipe for Disaster
Posted by: rlawson36 (IP Logged)
Date: June 29, 2012 12:33PM


brilliant article.Thanks.



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Re Ideology Investing A Recipe for Disaster
Posted by: The Science of Hitting (IP Logged)
Date: June 29, 2012 05:35PM

Thanks Rlawson36!



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Re Ideology Investing A Recipe for Disaster
Posted by: shadowgal (IP Logged)
Date: June 30, 2012 01:18AM

I agree. I really like that reference to a "cabbage mind"!



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Re Ideology Investing A Recipe for Disaster
Posted by: Invest E Gator (IP Logged)
Date: June 30, 2012 01:30PM

As much as Buffett "doesn't have an opinion", he sure is quick to take to the news or hop into his jumbo jet and fly over to DC to tell our congress to increase spending, increase taxes (but by only marginal amounts), hand over the bailout checks, increase the debt ceiling; and then hardly a peep regarding the implications as to where this fiscal irresponsibility is taking us. He may be soft spoken and revered both within the investment world and beyond, but it looks like he has some pretty strong opinions here as far as his political agenda is concerned.

As far as the premise of your article that ideology + investing = disaster, I would agree with you 100%, because it assumes that someone would be leaving out value considerations. We can be sure that Buffett wouldn't do anything like that, despite any other ideology maintained.



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Re Ideology Investing A Recipe for Disaster
Posted by: The Science of Hitting (IP Logged)
Date: June 30, 2012 05:27PM

Invest E Gator,

I don't know about Buffett's political "agenda" - I think he believes in something (just like anybody else might), and speaks when he thinks his opinion is relevant (for example, with taxes, where he has a clear understanding of the issue at hand). On the other hand, he stays away from that which disgusts him, like Super PAC's - summed up, even if you don't agree with his opinions, I don't see how people could not respect his actions.



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Re Ideology Investing A Recipe for Disaster
Posted by: paulwitt (IP Logged)
Date: June 30, 2012 06:07PM

I can see Mr. Buffett's point about reforming the tax code for the rich (which is one issue out of many). But I wonder what Mr. Buffett's thoughts are on the "Affordable Care Act" which is going to have a far greater impact on the U.S than collecting more taxes from the wealthy




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Re Ideology Investing A Recipe for Disaster
Posted by: Invest E Gator (IP Logged)
Date: June 30, 2012 07:51PM

Science,

He still has my gratitude for the investment education that I have been able to partake from him, however, he lost my respect as he took to the news lulling the nation into thinking something was proper about handing our tax dollars over into the hands of the uber-rich in order to "save the economy". Measures since, like the so-called "Buffett Rule", are paltry in comparison to the damage that has been done. It often also galls me a bit how he packages extremely pro-inflation policies into such friendly-sounding terms, and is then loading Berkshire up with the artificially-cheap credit at the same time. This is not only encouraging the system into a financial crash, but also seems to be bracing to derive the most benefit from it. Why he would be doing something like this, but then have his fortune pledged to charity, is beyond me. However, it looks like a pretty unfair tradeoff for the nation as a whole in order that he might extend his philanthropic reach.

I certainly don't understand the issues 100%, and would normally be inclined to give him the benefit of the doubt, but his pro-stimulus/pro-bailout actions have since placed everything else under a more negative and distrustful light. At the very least, we can be certain that as the economy goes back into another 2009-type crisis, likely to be much worse this time thanks to the bailouts he previously supported, he will be right back on the news again calling for even more of the public's resources to be handed over.



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Re Ideology Investing A Recipe for Disaster
Posted by: The Science of Hitting (IP Logged)
Date: July 1, 2012 03:48PM

"I certainly don't understand the issues 100%, and would normally be inclined to give him the benefit of the doubt, but his pro-stimulus/pro-bailout actions have since placed everything else under a more negative and distrustful light."

Charlie Munger's opinion on the bailout is interesting (he says they were absolutely required to save the civilization), and may make you rethink your opinion (I would be interested to hear your response to his commentary; the question is an hour and 32 minutes into the video):

http://www.youtube.com/watch?v=K6RS_PqudxU

In regards to Warren, I don't think he's "lulled" the nation to believe anything; there are plenty of wealthy individuals/corporations spending millions on lobbyists and advertisements that are much more likely to fit this description. I would respectfully suggest that you think about why you are against his position with such fervor; this article addresses exactly what we are talking about.

Thanks for the comments!



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Re Ideology Investing A Recipe for Disaster
Posted by: Invest E Gator (IP Logged)
Date: July 1, 2012 05:51PM

So we are going to take a survey of all of the rich people who think something was right and proper that the treasury be opened up and the people's money handed over? If finding such a concensus determined the difference between right and wrong then, by all means, I stand well corrected.

Because, of course, the bailouts were required in order to "save civilization"? Are you being serious?? Civilization isn't going anywhere, unless, of course, we go about corrupting the nation handing the public's resources over to their uber-wealthy friends, perpetuating the same mistakes, and continually growing what is already an enormous national debt bubble. What strikes me as a "cabbage mind" would be people who are unable (or otherwise refuse) to think for themselves, but instead seek the opinions of others to adopt as their own. Such minds are quite easily manipulated and we can be certain that they will be cheering the next time around, when we go into another financial crisis, and Buffett is back to making his rounds with the mainstream media.

"there are plenty of wealthy individuals/corporations spending millions on lobbyists and advertisements that are much more likely to fit this description."

Sorry. But the proof is in the pudding:
http://my.picresize.com/A1SOL3FY83/YFLFB68FFXEVVEDX52VC

Berkshire Hathaway spent $32 million dollars on lobbying between 2009 and 2012. He puts on a good show but, when it comes down to it, Warren Buffett is right there in bed with the rest of them. I am fervently against his "position", whatever that may mean, because he has shown himself to be fervently pro-corrupting the government in order to help his agenda and super-rich friends along. Perhaps this type of behavior comes with being a member of the club, because he was very accurate about inflation, and the damage that it causes, in his early letters, but now encourages it along for his benefit. Every now and then he speaks up for a tax increase here and there, but these measures are a miniscule counterbalance to the damage that is being done.



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