In the past, Warren Buffett (Trades, Portfolio) has said that he prefers to complete his analysis of a company before knowing where the stock is trading; the rationale for doing so is clear. However, despite my efforts, our connected world has won every time: I don’t think I’ve ever even made it through my initial analysis on a company without checking the stock price less than 10 times, let alone once.
If I do ultimately decide to make an investment, I find myself quibbling over a few percentage points higher or lower when the impact on my expected returns (time horizon of 5+ years) is immaterial – and I know I can’t guess the short-term moves anyway. It’s clearly not the most intelligent use of my time or effort, but it’s still something I find myself thinking about.
I’m hoping that can change. Reading “Priceless” by William Poundstone has reminded me once again just how harmful this behavior can be to sober analysis and rational decision making.
Let me share one example from the book that I found particularly interesting; I think it’s relevant to this discussion.
Participants in a study known as the “UN Experiment” began by spinning a wheel with various random numbers (think of a roulette wheel). After the spin, they were asked to answer two questions:
(1) Is the percentage of African nations in the UN higher or lower than the number that just came up on the wheel?
(2) What is the actual percentage of African nations in the United Nations?
What the participants didn’t know was that the wheel was rigged and could only land on two numbers: 10 or 65. Logically, of course, this shouldn’t matter either way: answering the second question has nothing to do with the outcome of the spin.
But what the researchers (Kahneman and Tversky) found was quite the opposite: the output from the wheel had a huge impact on the answer given to the second question: the average person with a spin of 10 guessed 25%; the average person with a spin of 65 guessed 45%.
Kahneman and Tversky concluded that participants in the UN Experiment were engaging in “anchoring and adjustment” – they were influenced by the magnitude of the meaningless cue.
This clearly has implications in the investment world. As an example, I’m currently researching Twenty-First Century Fox (FOXA); while looking around online to get more familiar with the name, I stumbled across a story that detailed ValueAct’s $1 billion investment in the company from July / August 2014. The article noted that Jeff Ubben (Trades, Portfolio) thought FOXA could be a $50 stock by the end of fiscal 2016. I don’t take that lightly: I’m a fan of ValueAct and listen when they think they’ve found a stock with 50% upside. But this knowledge has made it very difficult for me to analyze the name without using their thesis as a crutch for making the investment; I find myself looking for a reason to pull my estimate of intrinsic value towards ValueAct’s. To act like this hasn’t affected my thinking would be disingenuous. In my opinion, that’s not a good starting point for unbiased analysis – and I’m not sure it’s something I can consciously control.
Now consider the other activity I discussed above: monitoring day-to-day change in stock prices in hopes of paying as little as possible for a potential investment. The math shows that this is a pretty nonsensical exercise if you’re a long-term investor.
Consider Walmart (WMT), of which I’m currently buying more; I think double digit annualized returns for five-plus years are likely from here. From $73, 10 percent a year assumes the stock will be at ~$117.50 in 2020 (assume all the gains are in price appreciation for the sake of this discussion); worrying about paying $72 or $74 instead of $73 impacts the annualized return by three-tenths of 1 percent. On an initial $10,000 investment, that’s a difference of – drumroll please – 200 bucks. We’re not exactly talking about life-changing money, particularly in comparison to the actual gains on the investment (more than $6,000). This is before returning to the inconvenient fact that I have no clue where WMT will trade tomorrow, next week or next year. It’s clear that this is a waste of my time.
But now let’s consider this in the context of the “UN Experiment”. For weeks I’ve been closely monitoring the price changes for WMT; as $70 - $75 runs by day after day after day, it starts to seem like this is the “right” price for the shares; it becomes an anchor for the value of Walmart stock. If the stock suddenly jumped above $80, that would look like a relatively sizable move.
You’re kidding yourself if you don’t think that this constant feed of stock prices does not impact the way that you think about intrinsic value. As someone who hopes to generate outsized returns over time by investing in great businesses long term, it’s difficult for me to see how this is helping me towards that goal; clearly there’s a case to be made that it’s doing the exact opposite.
Lessons from Guy Spier
In his fantastic book “The Education of a Value Investor”, Guy Spier details a trip he made to Warren Buffett (Trades, Portfolio)’s office a few years back. He notes that Warren didn’t have a Bloomberg terminal or a computer in his office; he concludes that he has consciously chosen to do so in order to avoid having this “information fire hose” sitting on his desk.
Mr. Spier then goes on to explain what he views as the downside of a Bloomberg terminal (or rival product) – and it’s similar to how I feel with an internet enabled computer on my desk:
“All of these products are ingeniously designed to lure the subscriber with the seductive promise of nonstop information… they deliver such a relentless flood of news and data into investors’ brains that it’s hard to muster the self-discipline to turn off the spigot and concentrate on what matters most. You see stock tickers flashing before your eyes, news alerts blaring for your attention… I began to realize that this call to action wasn’t helping me at all; nor were the endless hours of information surfing.”
His response to this issue is where I think we can learn something. During the financial crisis, Spier decided to go cold turkey, staying away from the Bloomberg terminal for days on end.
When he moved to Zurich, he positioned the Bloomberg terminal in a way that forced him to stand in order to use it; the unnatural position makes it difficult to be lulled into hours of endless information / noise. In addition, Spier has set up a “quiet room” that serves as a reading area free from distractions. After reading some of Grahamites' recent posts (like this one), I think that’s another idea that could be worth considering.
I’ll add in one more idea: Spier notes in his book that he switched from a personal Bloomberg login to a company login, in hopes that this would limit his access to the firehose.
My idea relates to websites like Google Finance, which provides a continuous update on the stock prices for every company I own as well all of the one’s I’ve recently looked at (potential investments). I used to find this efficient and indispensable; now I’m questioning whether access to all of this data on one screen is a good idea. The "big" moves –Â a few percentage points - start to stand out, becoming a call to action. Instead, I think accessing prices on a name by name basis (once a week or so) would go a long way in removing the constant flow of data that negatively impacts my ability to think long term.
Conclusion
In his book, Spier notes that he checks stock prices “no more than once a week.” This seems like a stretch from where I’m starting, but I would ultimately like to get there. One thing is sure: doing so would help me focus my attention on what matters for successful investing long term.
