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Ideology + Investing = A Recipe for Disaster

June 29, 2012 | About:
The Science of Hitting

The Science of Hitting

231 followers
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.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would 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.

Rating: 4.4/5 (18 votes)

Comments

rlawson36
Rlawson36 premium member - 2 years ago


brilliant article.Thanks.
The Science of Hitting
The Science of Hitting premium member - 2 years ago
Thanks Rlawson36!
shadowgal
Shadowgal - 2 years ago
I agree. I really like that reference to a "cabbage mind"!
Invest E Gator
Invest E Gator - 2 years ago
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.
The Science of Hitting
The Science of Hitting premium member - 2 years ago
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.
paulwitt
Paulwitt - 2 years ago
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

Invest E Gator
Invest E Gator - 2 years ago
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.

The Science of Hitting
The Science of Hitting premium member - 2 years ago
"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!
Invest E Gator
Invest E Gator - 2 years ago
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.

The Science of Hitting
The Science of Hitting premium member - 2 years ago
Invest E Gator,

To save us both some time, let's agree to disagree; we have a different opinion on the bailout, and I think the remainder of the discussion is purely unfounded speculation (he does a great job of hiding his status as a "member of the club", that's for sure...)

I would love to hear about Warren's strategy of helping his super-rich friends (that "Buffett Rule" really sticks it to the middle class; of course it doesn't matter to Warren who's raking in the big bucks with that $100K annual salary), but I think reading some 10-K's would be a better use of my time. Thanks again for the comments!
Invest E Gator
Invest E Gator - 2 years ago
Indeed. I enjoy the education and the sport of digging into such matters and had no expectation of convincing you over, truth inevitaby rises to the top on it's own, so Ill happily agree to disagree. If Buffett had not taken part in one of the greatest moral catastrophies of our time, where trillions of our dollars got tossed around, in various ways, into the hands of the blossoming elite (to "save the economy and even civilization?!?"), the couple of billion that he now proposes to generate would actually have some meaning to it. It's a sad reality that most people are limited in comprehending scale, or have very short term memories, when it comes to such things. Despite his pro-bailout/pro-stimulus/pro-spending/pro-inflation agenda, he is donating his fortune to charity, so he will probably still go down in history as being a man of the people. Good for him.
brianbook
Brianbook premium member - 2 years ago
Invest E Gator I think you have chauffeur knowledge of social wisdom. In contrast, Mr. Buffett has Planck knowledge which is supported by God's revelations to the OT prophets, the Gospel of Luke, the moral philosophy of Plato, Aristotle, Michael Sandel, Nicholas Wolterstorff, & the economics of Joseph Stiglitz, Jeffrey Sachs, Alan Blinder, Paul Krugman, James K. Galbraith, & Tomas Sedlacek. As Charlie Munger would say, "The Lollapalooza Effect" is readily apparent. Wisdom is the art of living well, & Warren Buffett is a voice to be heard.
Invest E Gator
Invest E Gator - 2 years ago
Carlos Slim Helu also has a lot of interesting things to say, but should we be inviting his tailored version of corruption to the nation as a whole? I would prefer neither of the above. I'm surprised that you would consider Buffett to be so God-like while Berkshire Hathaway is still paying off our politicians to get who-knows-what in regulatory concessions? Perhaps he should set the example in corporate citizenship and let our elected representatives do their job in representing the will of the people, rather than to get lobbied into granting special benefits for his companies? That right there, as anybody in their right mind already knows, is the real recipe for disaster.
brianbook
Brianbook premium member - 2 years ago
Ad hominem responses are often argued by sophists, who seek to rationalize their ideology.
brianbook
Brianbook premium member - 2 years ago
Ray Dalio is an excellent example of a successful thinker & investor that uses reason, not ideology. The problem of an excess of faith in an idea (ideology), is best analyzed in "The Metaphysical Club", by Pulitzer Prize-winning author, Louis Menand.
Invest E Gator
Invest E Gator - 2 years ago
Really? That's interesting. Because sophists are easy to identify when they are making (curiously erroneous) ad hominem claims.
Invest E Gator
Invest E Gator - 2 years ago
I'm familiar with Ray Dalio, and completely agree with his beef with ideology, makes perfect sense. He is very clear in his writings that people should seek to establish their own principles, based on observations and understandings of reality, rather than to blindly adopt those of another. He would probably say that this applies universally, even including the political ideology/agenda of the most successful investor on the planet. Anyone's particular status in life does not imply that we should not analyze and think things through.

Dalio also notes that he doesn't believe that able bodied people should be given things for free, as it weakens their need to get stronger and contribute to society. This ideology of "give free things away" is not only something that Buffett condones, but has actively campaigned for, even when it comes to massive handouts for his fellow plutocrats. Lucky for Buffett, he doesn't apply this ideology to his investing, only to the money belonging to others sitting in the national treasury, otherwise he wouldn't be where he is today. I find such behavior to be completely contrary to living in a modern and free society; such a thing is much more comparable to the likes of our government regulatory monopolist to the South, Carlos Slim Helu.
brianbook
Brianbook premium member - 2 years ago
I think President Obama & Buffett have similar visions for our great country, i.e. in a more just & peaceful society, ALL Americans can flourish. You may disagree with this social wisdom, but they stand on the shoulders of successful thinkers from many disciplines.
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Invest E Gator before you adopt a hard and possibly flawed position on Buffett, try reading the works of those that likely influenced him such as Benjamin Graham writings (S&S, grain normal, etc) and Andrew Carnegie's The Gospel of Wealth?

Furthermore, were you also offended by Buffett's prior semi-political positions in the 1970s, 80s, and 1990s? Beyond the recent commentary on some but not all rich being able to pay a low tax rate, Buffett has offered his opinions on trade deficits, budget deficits, reforming the casino society and inflation.

For example:

"But the potential for real improvement in the welfare of workers at the expense of affluent stockholders is not significant. Employee compensation already totals twenty-eight times the amount paid out in dividends, and a lot of those dividends now go to pension funds, nonprofit institutions such as universities, and individual stockholders who are not affluent. Under these circumstances, if we now shifted all dividends of wealthy stockholders into wages - something we could do only once, like killing a cow (or, if you prefer, a pig) - we would increase real wages by less than we used to obtain from one year's growth of the economy." - Warren Buffett

Another example... A 100% tax!!! Yet there was no huge anti-Buffett outcry in 1986:

"Let the government impose a 100 percent tax on any profits derived from the sale of stocks or derivative instruments...

There will, of course, be some negative byproducts from this reform. But the drawbacks seem minor compared with the gains that will be realized. They seem minor also in comparison with the weaknesses of other legislative measures that would attempt to tame the casino society by imposing straitjacket rules on both Wall Street and corporate America.

Investors, entrepreneurs and operating managers would be unaffected by such a tax and would still have available the full panoply of free market business alternatives." - Warren Buffett
Invest E Gator
Invest E Gator - 2 years ago
Hi Alberta. At first I was making some curious points about Buffett, but now its turning poor Science's article into a neverending rant. The debate is fun but it's not like this is a central thing to my existence or anything like that. I'm going to respond to your post and read anything you have to say, but then I'll leave the subject alone.

List of works read likely related to influencing him:

Benjamin Graham -

Intelligent Investor (read it twice)

Interpretation of Financial Statements

Securities Analysis (didn't get much out of it)

Andrew Carnegie -

Autobiography

Gospel of Wealth

Various historical biographies about

Benjamin franklin -

Way to Wealth

Autobiography

Compilation of his other writings

Various biographies about

Various historical works involving Franklin as a founding father

Etc.

Warren Buffett -

Letters to Shareholders (read through them twice)

Letters prior to Berkshire Hathaway

I find nothing in the works of those who would have likely influenced him, nor even in his own writings, to accept his agenda as appropriate. At one time I kind of agreed with him because of presumed expertise, but the initial eyebrow to it all went up around bailout time. Like, really? We need to pass bills to give money to rich people because it's going to "save the economy?" Either do exactly that, or the whole world was going to end? Welcome back Reaganomics, except now the rhetoric is ramped up and we are just handing the money directly over. Would Benjamin Franklin have approved of this kind of thing? Perhaps, if Buffett had written in his letters that he couldn't wait to rise to a level of prominence and drum up support for an opening of the treasury for his wealthy friends, the people who he also says he wants to tax so bad, there would be much less to be surprised about.

Reading through Buffett's positions on things in the past, sure it's fine on writing, and I can understand the admiration. It's all words for helping out the little guy. The problem here would be with what he ends up taking part in as he steps into playing politics. For example, along with the issues already mentioned, in his most recent letter, he makes a note about train regulators, how he is ok with them as they represent "the will of the people," something along those lines... sounds nice, but what's happening? Millions are being paid by Berkshire to congress so as to hijack this "will." Just check public lobbying reports. Normally I would probably think "Oh, its just Buffett." But after the bailouts? No. We are far better off that he put his citizenship into a blind trust, and burn his future philanthropy money, than to be doing our country such disfavors.

As an investor and an educator on the subject of investing, we have none better than him, but he is a fallible human being, like the rest of us, and current fad of "Ideology + Worship Investing Diety" strikes me as ='ing "A (Real) Recipe for Disaster." If we are going to continue straying into following Buffett-economics, where the economy gets bubbled and massive fortunes handed over to people who already have them, we must also follow his recommendations as far as taxing it back. In fact, I suspect we probably can't tax enough under such circumstances, and we may be far better off as a country by rejecting this corporate handout ideology completely.

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
I think Buffett is highly pragmatic with a long, long term view. Pragmatic in that he reads so much that he invariably must read the "other side's views" and so avoids losses by agreeing with, seeking confirmation or recognizing threats to his positions. He also seeks out and identifies long-tail risk (except he says missed it with the housing-credit boom.) As Munger has said, 'he's a learning machine'. Ideologues aren't learning machines, they are selective perception machines.

http://www.guardian.co.uk/business/2010/jun/02/warren-buffett-financial-crisis-inquiry-live

"Buffett is asked why he sold his stock in the mortgage aggregator Freddie Mac before the financial crisis began. He says he was concerned about Freddie Mac buying securities that had nothing to do with housing, and was suspicious about the activities the company was getting involved in: "I figured if you see one cockroach, there's probably a lot more in the kitchen."

"The panel quizzes Buffett about his often quoted statement that derivatives are "financial weapons of mass destruction". Why, then, has he been investing in them?

"Buffett bluntly says that if they're used improperly, derivatives pose system-wide problems. But he sees no reason why he shouldn't be opportunistic: "I use them to make money - if I think they're mispriced, I buy them." "


I tend to partially separate Buffett the CEO from Buffett the individual/statesman. For instance, Buffett was in favour of bailout action and depositor protection and I see that as coming from Buffett the individual. I also see those views as being against his own financial self interest as he apparently was personally, around 100% in treasuries when the markets plunged and had things really come apart Buffett could very likely have skillfully picked through the financial ruins to far, far, far greater personal gain.

eg.

Buffett the statesman: public warning on systemic risks (weapons of mass destruction / WMDs)

Buffett the CEO: investing in what he sees as mis-priced derivatives


As CEO, Buffett has an obligation to his fellow investors and his words in his annual reports focus on information to their benefit. He's also reportedly a very hands off investor and so lobbying isn't necessarily due to or associated in anyway with his corporate initiatives.

On the bailouts you might find this interesting (some people say Buffett took bailout money, when in fact it was the banks he owned that took the money):


This is not Buffett talking but the former CEO of Well Fargo:

http://www.bizjournals.com/sanfrancisco/blog/2012/06/wells-fargo-dick-kovacevich-occupy-tarp.html?ana=yfcpc&page=all

"As my comments were heading in that direction in the meeting, Hank Paulson turned

to Fed Chairman Ben Benanke sitting next to him and said, 'Your primary regulator is

sitting right here. If you refuse to accept these funds, he will declare you 'capital deficient'

Monday morning,'" Kovacevich recalled...

"This was truly a 'godfather moment.' ..."
PHILCIR
PHILCIR - 2 years ago
buffett has been using inside info used legally by congress for years. you are talking about the Mount Everest of crony capitalism. Keep drinking the kool aide about reading annual reports, ben graham, and the other bull shi^.

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