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.
About the author:
I hope to own a collection of great businesses; to ever sell one, I demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.