As investors, we face a range of problems and barriers to overcome daily. By far the most significant issue we have to overcome is our own emotions.
This is where so many investors fall down, especially when it comes to value investing. Value investing is mentally very taxing. It requires discipline, patience and structure. Without these qualities, it is not easy to be a successful value investor.
Investors also face the problem of what Charlie Munger (Trades, Portfolio) calls "fatal unconnectedness."
Fatal unconnectedness
The billionaire investor spoke about this topic in 2003 as part of a lecture at the Santa Barbara Economics Department titled, "Academic Economics: Strengths and Faults After Considering Needs."
In the speech, Munger discussed the benefits and drawbacks of economics. He stated that economics, "like much else in academia," is tooinsular and creates what he called the "man with a hammer syndrome." Here's how Munger described it in 2003:
"I think I've got eight, no nine objections, some being logical subdivisions of a big general objection. The big general objection to economics was the one early described by Alfred North Whitehead when he spoke of the fatal unconnectedness of academic disciplines, wherein each professor didn't even know the models of the other disciplines, much less try to synthesize those disciplines with his own. I think there's a modern name for this approach that Whitehead didn't like, and that name is bonkers. This is a perfectly crazy way to behave. Yet economics, like much else in academia, is too insular.
The nature of this failure is that it creates what I always call, 'man with a hammer syndrome.' And that's taken from the folk saying: To the man with only a hammer, every problem looks pretty much like a nail. And that works marvelously to gum up all professions, and all departments of academia, and indeed most practical life. The only antidote for being an absolute -5- klutz due to the presence of a man with a hammer syndrome is to have a full kit of tools. You don't have just a hammer. You've got all the tools. And you've got to have one more trick. You've got to use those tools checklist-style, because you'll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it. But if you've got a full list of tools, and go through them in your mind, checklist-style, you will find a lot of answers that you won't find any other way. So limiting this big general objection that so disturbed Alfred North Whitehead is very important, and there are mental tricks that help do the job."
So how do we as investors avoid falling into the same trap?
The answer is to keep reading. Reading about different subjects and topics and building a multidisciplinary understanding of the world around us is the only way we can fully understand how different disciplines interact with each other and the results they give.
This is particularly important when evaluating individual companies. A company might look attractive at first glance, but we have to consider what makes the company tick. Why do customers like its products or services? What has helped management get ahead of the game?
These are not questions we can answer with a simple formula. We need to understand much more about the business environment and the company's history, as well as the performance of the rest of the sector.
The only way to do this is to keep reading, improving our knowledge and remembering that nothing should ever be taken for granted or considered in isolation.
The economy and companies are complex systems with hundreds of thousands of moving parts. Having some basic idea of how all these parts work and interact together is the only way to understand the processes that lead to a specific result.
Read more here:
- What Now for Michael Burry's GameStop?
- A Look at Berkshire's McLane Distribution Business
- How to Understand Value Investing: Thoughts on the Past Decade
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