Have you truly made up YOUR mind?
I’m always looking for Value.able contributions that will enahnce the value of our Insights blog.
Scott’s comparison of the performance of a Value.able A1 portfolio and a conventional portfolio promoted by a large bank over the last six months is one such example. Nick’s contribution here about independent thinking is another. Take it away Nick…
“Most people would rather die than think, in fact they do so.” Bertrand Russell
The title of this post which Roger has kindly let me write for his blog may seem like such elementary and common sense advice that it need not be written at all – kind of like telling a friend to make sure he looks both ways before crossing the freeway.
Is thinking independently when it comes to investing really so obvious? And do people practice it consistently? I would say not. Just because something is obvious does not mean it will be practiced and not thinking independently, by which I mean not thinking for yourself and making up your own mind on an issue (not necessarily having a contrary opinion for the sake of having a contrary opinion), is one of the surest ways to destroy wealth and end up dissatisfied as an investor (aside from the strong likelihood of losing money you will also lack autonomy over your future). I have made this mistake in the past and can speak from experience.
Ben Graham once said “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
And in the 1985 Berkshire Hathaway Annual Letter to Shareholders, Warren Buffett shares with his readers this story passed down from Ben Graham which illustrates the lemming-like behaviour of the crowd: “Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled – we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!”. Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumour after all.”
This is not the fate you want for yourself!
And don’t let hubris get in the way. Intelligence alone will not keep you away from the dangers of crowd behavior and emotion. One of history’s most gifted minds and scientists, Sir Isaac Newton, was caught up in the emotion and chaos of crowd behavior which resulted in him losing his fortune in the South Sea Shipping Company Bubble. Sir Isaac Newton had previously made a packet on this very same company although after selling and watching the share price continually keep rising, he reinvested everything he had before the crash. For as long as he lived he forbid the words South Sea Shipping Company to ever be mentioned in his presence. It was not a lack of intelligence which brought Sir Isaac unstuck, it was, I argue, his lack of independent thought on the merits of the South Sea Shipping Company as a suitable investment.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Ben Graham.
Once you have determined to think independently and make up your own mind on a company’s current strengths and weaknesses, and its current and future earnings prospects, how do you best do this? Perhaps the most effective way is to follow the advice of the famous algebraist Carl Jacobi who said ‘Invert, always invert.’ So if from your reading you believe company XYZ to be possible investment material (either from Roger’s blog, the newspaper, a friend, your stockbroker) read everything you can and formulate as strong a case as you can on why it would make a lousy investment. If, after having made as strong a case against the company as the information allows, it still looks pretty good and is selling at an attractive price, then it is worthy of further consideration. It has also been useful to me in the past having friends help me out with this. Usually before making an investment I’ll ask my most intelligent and able friends for their opinion on why I shouldn’t invest in company XYZ. This will not mean that you’ll never make a mistake again, although when you do at least you’ll be able to understand why (having studied the reasons against making the decision in the first place).
“I want to be able to explain my mistakes. This means I do only the things I completely understand.” Warren Buffet
Charlie Munger, in a speech given at USC (which you can all view on YouTube) says “I have what I call an iron prescription that helps me keep sane when I naturally drift to preferring one ideology over another and that is I say I am not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who are supporting it.” This is great advice, and to tailor it to investing all you need to do is replace the word ‘subject’ with ‘company.’
Charlie Munger also likes to talk about the importance of having a latticework of mental models in your head and how the big ideas from across a broad range of disciplines can often be used in sync to best analyse a particular problem. I won’t expand on this now, although can recommend his speeches and essays which are easily available on the internet.
Having a great interest in investing, I find this blog is a wonderful source of ideas and learning and really enjoy reading the comments written every day. That said, one way in which I believe it could be improved is for there to be more argument and questioning, something which is happening more and more as the share price of recent blog favorites has dropped. If someone says they believe XYZ to be a great quality company without providing reasons they should be held to account and asked why? If the only response is that Roger has it as an A1 then a fail grade would be mandatory. If someone says they believe that company XYZ has excellent earnings prospects they should again be asked why? And if their response is that the analysts consensus on Comsec says so then again, another F.
I hope that this post may have been of some interest and if you have some stories of success as a result of independent thinking, I would be very interested in reading them.
Nick Mason
Roger’s Note: And if you have a similarly lucid and instructive idea that you would like share here at our Insights blog, go ahead and submit. Not every contribution can be published as a post, but we will certainly post those we like.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 23 September 2011.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Ray H
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Thanks Nick, your point is well made. Sadly I think this concept is respected and practised by so few and largely ignored by those who would benefit from it the most.
Andrew
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I completley agree Ray, i for one (maybe perhaps cyncically) have seen the irony in a post on independent thinking which basically allowed anyone to post any thought they have having only 10-11 comments when a post after it is now at 67 where most posts are commenting on how their IV’s match up to Rogers and why is it different and MQR’s.
I was really excited to hear some stories on this post and theory’s about quality that i could read and ponder about.
Andrew
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I thought i would add a story of how my independent thinking helped me make an investment decision.
About 4-5 years ago, i was an owner in Tabcorp. There was a time where the price was around $18+ due to lots of rumours about a macquarie/pbl/tatts led takeover. It seemed to be considered as something that would definitley happen.
I took a step back from the noise and had a think. I did some researcha nd i found (i can’t remember where) that there was a rule that said something like people needed to get victorian government approval to own more than 15% of tabcorp shares. As i said i can’t remember exaclty where or what it was.
I realised that any takeover would need various governments to approve it due to the heavy regulation of gambling/casino companies. Also, Tabcorp was blocked from purchasing Unitab (i think) sue to competition concerns and tatts picked it up instead. If tabcorp was not allowed to purchase unittab for competition, than my thinking was how could the combined unitab/tatts own tabcorp. Surely this would be a greater competition concern.
The final thought was in regards to price, i think its fair to say that if a matureish large company share price is at the highest point its been in a long time than it is probably too expensive for a takeover and probably a good time to take a profit.
I sold the shares to some poor person above $18 which banked me a nice profit. This seemed like the best play as the company had a few risks coming up in regards to licence renewals etc.
History tells us that the takeover never happened and the share price today is a lot lower than the $18.00. They lost a unit due to a change in legislation regarding vic pokies and have now split into two companys, which if the PBL demerger is anything to go by, doesn’t do much for shareholders at least in the short term.
If i had listened to the crowd i would have got excited and probably bought more to profit from in impending takeover. Instead by researching and thinking about it from a business point of view, i managed to book a decent profit and get out of a company which ended up having a few issues.
Janette Mouttet
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Roger’s Note: And if you have a similarly lucid and instructive idea you would like share here at the Insights Blog, go ahead and submit. Note every contribution can be posted but we will certainly post those I like.
Should this read NOT not Note? (ie last sentence)
Regards Janette
Roger Montgomery
:
Thanks Janette. Good pick up.
Nick Mason
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Thank you Andrew, much appreciated.
Nick
David V
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Hi Nick,
Great article. Thanks for taking the time to right. To often we see detractors chased off with pitchforks. We need all points of view for a balanced argument and intelligent investing.
Kind Regards,
David
Nick Mason
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Thanks David, I’m glad you enjoyed it.
Nick
Russell Robinson
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Hi Nick & Roger,
Excellent post.
The “invert” concept is the best one for me right now.
Andrew
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Hi Nick, Roger,
Great post, i completley agree. Independent thought has an intrinsic value far greater than anyone can imagine. I don’t pretend to know everything about investing, i continue to follow a path that see’s me learn more and more about it. I continually question the methods, formula and criteria i look at. As investing is something i would consider myself passionate about i have no concerns spending time in the pursuit of further knowledge and i doubt it will ever end.
A major mistake i think people could fall into is that by reading value.able they stop their search for greater knowledge, focus on plugging info into the formula and wait for Roger to mention if something is A1 or not. I have personally thought it might serve the blog better (or at least the comment section) if Roger never again freely mentioned his values or quality ratings but they do help us all and i for one don’t mind seeing whether his thoughts match mine about a company. Some do and some don’t, we can both be right and neither necessarily is wrong.
Its only by independently thinking that we can understand our circle of competence. I like the idea of prosecuting a case against an investment as wella s one for. It means looking at all the angles.
There is so much jargon, pumping, promoting, accounting and headlines to help people lose their heads and start piling in money without understanding the risks (to both company and investment). I think the best thing a person could do is if they start getting extremley excited about a company that they just want to get on board, then they should turn the spreadsheet, internet and computer off, go outside and do something else, completley forget about the investment. Then do some research, take another break and if after this time an investment case is still compelling then go for it. i think as much as a motivator fear is when selling, irrational overconfidence is just as much a destructive motivator. You make money when you buy not when you sell.
My path will forever continue, i will happily listen to everyones viewpoints and this is what makes this blog so well is that we can listen to others and question them and ourselves with a bunch of kind like minded people. This journey has seen some promising signs for me, i have come up with a series of criteria and a theory behind it, which i think helps identify good investment opportunities. I am currently looking down other paths, i might not find anything but just going out on a limb and doing some investigating to back up my various theories could identify some further things that will make my investing journey more promising and profitable.
If i didn’t use independent thought i would have seen myself investing in ABC, Myer etc. Some say knowledge or learning is power, i say learning is freedom.
I know this is a long post, i apologise, its something that i am passionate about. The more thinking we do, the more we can share with eachother and help eachother become better value investors.
Andrew
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Hi Nick,
You have created a well written summary of ideas and anecdotes. Perhaps you should continue writing as a practice.