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Do You Know Enough to Form an Opinion

June 29, 2014 | About:
Grahamites

Grahamites

156 followers
If you watch CNBC, or you read a lot of articles from websites such as Seeking Alpha or Motley fool, you will notice that most of the time, you will come across some opinions about a stock or a macro event. Do you ever step back and think about the validity of those opinions?

In investing, too often we form an opinion too quickly and too often we hold on to our opinion due to commitment and consistency bias. I was talking to a friend about MasterCard and I said MasterCard is a good business because you can cut the margin by half and it still has a higher margin than the average business. It has also been a compounding machine because of the growth opportunities both in the U.S and internationally. His immediately formed an opinion that MasterCard will no longer be a good business because mobile payment will make credit card obsolete. I asked him why that is. He said now in any places you can pay for your purchase through a mobile app. I then asked him do those mobile app allow you to pay for your purchase without a credit card. He said with great confidence that of course you can pay with your debit card or paypal. Enjoying being a pain in the ass, I asked him a bunch of annoying questions: Do you see Visa or MasterCard logo on major debit card? Do you earn points on debit cards or paypal? What percentage of mobile transactions are not conducted through linking credit card and isn’t your paypal account linked to credit cards and debit cards anyway? Can banks charge 18% on your debit card or paypal balances? The Q&A went on and on. In the end, he changed his mind reluctantly because he couldn’t back up his opinion any more.

When I started investing, I too, had the tendency to quickly form an opinion without properly backing it up with evidence. I was grilled by my much wiser mentors the same way my poor friend was incessantly bugged by my headache-causing annoying questions.

But I became a better investor because now I realize that we should not form an opinion too quickly without having done the research to know enough about a company. I feel comfortable to acknowledge that I don’t know enough to have an opinion on most stocks traded on the New York Stock Exchange. When I do have an opinion on a stock, I’d like to have what I call the second level-opinion, which is opinion well thought and properly backed up. This is a little different from Howard Marks (Trades, Portfolio)’ second-level thinking because a second-level opinion doesn’t need second-level thinking. It only requires doing the proper amount of research to have an educated opinion. That’s it.

However, I believe if you start cultivating the habit of forming second-level opinions and refrain yourself from expressing first-level opinions, which are often intuitions, you may be able to possess the second-level thinking ability eventually. All the pains you have to go through and all the efforts you have to make to consistently have second level opinions will most likely make you see things clearer and better in the end.

Naturally you may ask. How can we form second-level opinions and keep ourselves from expressing first-level opinions? My personal experience has taught me that the latter simply requires you to always ask yourself whether you have enough evidence to have an opinion. If the answer is no, simply say I don’t know. As to how to form second-level opinions, there is no easy way. You have to be diligent, persistent and tenacious. You have to always search for the truth. This means reading as much as you can, be it books or annual reports. This means asking a lot of whys and being brutally truthful to yourself. It's not supposed to be esay.

It seems appropriate to end this short discussion with a Mungerism quote-



“I’m convinced that everything that’s important in investing is counterintuitive, and everything that’s obvious is wrong.”




Rating: 5.0/5 (7 votes)

Voters:

Comments

PhilipCohen
PhilipCohen - 5 months ago

Amazon / Apple / Braintree / Dwolla / Facebook / Google / ISIS / Square / Stripe / Telcos / Whoever Payments—the reality …

“My theory, which I stick by today, is that AAPL’s end game is to develop a broad-reaching e-commerce engine that will compete not only with PayPal, but also [with] traditional credit card companies. More recently, some of the pundits that cover AAPL have arrived at similar conclusions.”—Paul McWilliams, supposed “technology stock expert”. …
“Back in 2012, I wrote that Apple would eventually kill off Visa and MasterCard on thestreet.com.”—Forbes Contributor, Richard Saintvilus.
http://www.forbes.com/sites/schifrin/2014/06/04/are-mastercard-and-visa-in-apples-crosshairs/

“Apple, or any future competitor that has already built a base of trust, could begin tomorrow and charge half the commission of eBay, Visa, or MasterCard, … and the concept of real competition [for eBay’s “PreyPal”] in the space is farfetched for the next few years.”—John Ford, SeekingAlpha Contributor [What a load of tripe!] …
http://seekingalpha.com/article/2256903-ebay-quality-at-a-very-attractive-entry-point

What nonsense! Do any of these commentators have any understanding of how the retail banks’ payments system actually works, or how eBay’s clunky “PreyPal” actually works (or, too often for the merchant, does not work)?

The safe way: Payer’s Bank > Credit/Debit Card > Merchant’s Bank.
The other way: Payer’s Bank > “PreyPal” > Credit Card/ACH > Merchant’s Bank?

The professional payments networks, ie, the "bankcards", Discover (~2%), MasterCard (~33%) and Visa (~52%), plus Amex (~12%), still process ~99% of the world's retail payments between them, and the "bankcards" already offer an "instant loan" model—for what otherwise is a "credit" card? And, Amex will have difficulty growing its market share any further because it has little chance of ever matching the vast merchant coverage of MasterCard/Visa until it matches the lower merchant discount fees charged by MasterCard/Visa …

So, notwithstanding the constant talk of “disruption”, it appears that nothing has yet “disrupted” the two major bankcards; and I have no doubt that absolutely nothing in Apple’s “mobile” plans (short of buying their own bank, which still will not give them unfettered, interactive access to depositors’ funds in other banks, except via MasterCard/Visa) will disrupt the existing bankcards. The fact is, Apple does not now have interactive access to depositors’ funds in retail banking accounts, nor is Apple, or anyone else, ever likely to get that access—except via MasterCard/Visa; any other way is at the ultimate merchant’s peril, as the great many negative stories all over the internet about “PreyPal” attest.

Like all the other pretenders, “Apple Payments” will always be riding on the back of the same retail banking networks that they currently do, via their own retail banker, as simply one more, albeit very large, "Credit Card Merchant Account" operator. And, any credit that Apple might offer to supply will still have to be provided via an agreement with a licensed and regulated credit provider (eg, a real bank), as is already the case with that clunky other "payments pretender", eBay's infamous "PreyPal" …

Even if these payments middlemen make use of direct debits via the ACH system (as “PreyPal” prefers to do to more cheaply access payers’ funds), such access is not interactive—there is no immediate acceptance of the debit by the bank nor any guarantee that, the following day, the bank won’t reverse the debit due to an insufficiency of funds. The simple fact is, direct debit via ACH is not a suitable mechanism for physical point-of-sale transaction payments where the goods involved are going to immediately walk out the door (nor was the relatively primitive bank-to-bank ACH system ever intended to be used as a mechanism for non-bank middlemen to access funds for such transactions); the only safe route for a merchant for such transactions (credit or debit) is via a retail bank Credit Card Merchant Account with its interactive linking to the retail banking system …
=
The choice of the payment vehicle, from those offered by the merchant, is driven by the payer who directly bears none of the cost of such choice. Sensible payers have their funds stored in a licensed, prudentially regulated, financial institution; world-wide these institutions issue MasterCard/Visa credit/debit cards—and now the “digital wallet” extensions thereof—to enable depositors to easily access such funds on- and off-line. And, unlike the “pretenders”, the retail banks offer an effective and balanced transaction dispute resolution process for MasterCard/Visa transactions.

People should therefore stop kidding themselves; not Apple nor any of the other "payments pretenders" (including Bitcoin) are ever going to have a noticeable effect on the “bankcards”, MasterCard/Visa and their new “digital wallet” extensions—other than to make MasterCard and Visa even better long-term investments ...

What then about Bitcoins? Obviously, I’m missing something, but why would any buyer choose to complicate any retail transaction by paying with Bitcoins, which are effectively a volatile “foreign” currency with a ~2% FX conversion fee (~1% buy/sell at each end)—even for a local transaction—and has no transaction dispute resolution process?—Dream on Bitcoin fanboys …

And what about eBay’s “PreyPal? Well, next time you visit The Home Depot, ask a cashier how the eBay-subsidized "Pay Here With PayPal" experiment is going—LOL ...

But, back to Apple. “… with the company being privy to payment card details of hundreds of millions of iTunes users”

With the advent of the new, professional, all-purpose “digital wallets” from both MasterCard (“MasterPass”) and Visa (“V.me”), I suspect that it is only a matter of time before such “credit card details” (ie, card numbers) will not be manually useable for making a payment (or will come with a higher discount fee, as is currently the case sometimes with “card not present” transactions), for it is the possible fraudulent use of these card details that is the real, and costly, ongoing weakness of the card system. From a security point of view, I see such card details becoming nominal only and the likes of the “MasterPass” and “V.me” digital wallets (accessed via mobile or plastic card, or online) becoming the dominant vehicle for all retail transactions—on- and off-line—with much improved efficacy and security for all stakeholders …

Regardless, finger print reading or an NFC chip only makes a smart phone a little smarter; a “payments system” it does not make. But, an NFC chip should facilitate the use of the new, professional “MasterPass” and “V.me” digital wallet apps …

Methinks there are no long term “spoils” in retail payments for Apple or any of the other payments middleman—only for those that otherwise keep safe our surplus funds—the licensed, prudentially regulated, retail banks …

Yes, there are presently some anachronistic features of the credit card system; the operational card details imprinted on the card and recorded on the card’s primitive mag strip are serious, fraud enabling, anachronisms and, undoubtedly, those anachronism will be phased out following the implementation of the approaching mandated EMV Chip+PIN regime (where the PIN may not be required for nominal value POS transactions), and the new MasterCard/Visa digital wallet extensions thereof.

jtdaniel
Jtdaniel premium member - 5 months ago

Philip,

Thank you for the helpful comments on Apple and Ebay. I am in agreement with the virtues of MasterCard and Visa, but your one sentence dismissal of American Express may be premature in terms of second-level thinking. AXP's closed loop system generates more profit per transaction, as merchant fees are not shared with banks on either side of each sale. Its smaller market share reflects an affluent individual and corporate customer base with a low default rate. Also, I would not discount the possibility that AXP's close relationship with Wells Fargo could lead to profitable growth in market share.

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