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Rupert Hargreaves
Rupert Hargreaves
Articles (746)  | Author's Website |

Charlie Munger on Overcoming Psychological Denial

Advice from Charlie Munger on how not to be your own worst enemy

February 27, 2019 | About:

As investors, one of the most significant problems we face is overcoming our own emotions and behavioral biases. Charlie Munger (Trades, Portfolio) has spoken on this topic many times.

The truth as it is

Munger, the business partner of Warren Buffett, has pointed out on many occasions that it is necessary to acknowledge the truth in the world as it is, not as you want it to be. This means admitting when you are wrong and have made a mistake, going back on your decisions and trying to improve the outcome.

A great way to double check yourself according to Munger is to consider an argument from both sides. He has said before that it is "bad to have an opinion you are proud of if you can't state the arguments for the other side better than your opponents." He called this process "a great mental discipline."

Value investing is a very arrogant style of investing. Generally speaking, value investors look for the most undervalued stocks and are willing to buy when the rest of the market is selling. However, to do so, you are admitting that you know more than the rest of the market, which is arrogant. It is important not to let this arrogance take over and dominate your decision-making.

You might think you know more than the rest of the market, but do you really? If you cannot articulate the bearish argument for the company you're bullish on, how much do you really know?

"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side." -- Charlie Munger (Trades, Portfolio)

Changing conclusions

One thing you will notice if you follow Charlie Munger (Trades, Portfolio) is that while he is vastly intelligent, he is always questioning his ability. What I mean by this is Munger never takes anything at face value. He is always willing to change his views and opinions if a more compelling argument presents itself.

In the past, he has said that this ability to change views and perspectives is one of the reasons why both he and Warren Buffett (Trades, Portfolio) have been so successful over the years. "Both Warren and I are very good at changing our prior conclusions. We work at developing that facility because, without it, disaster often comes," he has said.

Questioning your conclusions and abilities is not easy. It does not come naturally to most investors, and you have to train yourself at it. However, it is essential; otherwise, you fall into the trap of psychological denial.

If you cannot handle investment mistakes, and be critical of your own process, you could fall into a downward spiral. Or as Munger has put it in the past:

"One trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke. You’ve made an enormous commitment to something. You’ve poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think, 'Now it has to work. If I put in just a little more, then it’ll work.'"

This is something to remember the next time you make an investment decision. There is much more to investing than just analyzing stocks and clicking buy. Knowing and understanding why you made the decision, understanding who is on the other side of the trade and being open to changing your ideas if new evidence presents itself is essential to being a successful investor over the long term.

A final quote from Charlie Munger (Trades, Portfolio) sums up everything quite nicely:

"I feel that I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition."

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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