Ideology + Investing = A Recipe for Disaster

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The Science of Hitting
Jun 29, 2012
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Todays 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: heres a list of why most political diehards (on both sides) are likely to be poor investors:

1) They Always Think Theyre Right Anytime that I listen to a political talk show, its always the same thing: Heres why Im right and youre wrong (I'm paraphrasing). While that may work for winning political debates, it doesnt 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, theres a good chance that youre in for some unwanted surprises down the road.

2) They Have an Opinion on Everything Ive 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 dont 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 arent too fond of listening (I guess the thinking is that the other guy cant be right if you dont 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 ones mind; youve seen that, and you see it a lot with T.V. preachers, for instance theyve 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 youre young its easy to drift into loyalties and when you announce that youre a loyal member and you start shouting the orthodox ideology out, what youre doing is pounding it in, pounding it in, and youre gradually ruining your mind. So you want to be very, very careful of this ideology. Its 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: Im 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 Ive reached that state I am qualified to speak. This business of not drifting into extreme ideology is a very, very important thing in life.

Charlies 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.
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High-quality businesses for the long-term. In the words of Charlie Munger, my approach is \"patience followed by pretty aggressive conduct.\" I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.