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.”