On objectivity:
“The ethos of not fooling yourself is one of the best you could possibly have. It’s powerful because it’s so rare.”
–Charlie Munger
On mistakes:
“One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis. That is why we did so here.”
–Bill Ackman, after selling Netflix stock at a $400 million loss (but still outperformed peers).
On judgment:
“I’m right, and you’re smart, and sooner or later you’ll see I’m right.”
–Charlie Munger
BEING A FAN VERSUS BEING A JUDGE
America is obsessed with being fans—of celebrities, sports teams, and even political movements. It is a national pastime.
Fan logic is fine for your favorite sports team but bad for your money.
I understand why people are fans and why they think the way they do. No matter what the situation, you root for your team. There are no decisions to make—your team is good; the other guys are bad. It is a simple choice.
But your team is not your money. Being a fan of particular stocks or entrepreneurs is understandable. Being a fan of specific industries can often make sense. But usually, being a fan is not the best way to look at your investments.
THE STOCK MARKET—RECENT DOLDRUMS
If you are an active investor, it is especially important to be a judge and not a fan right now. The broad-based Standard and Poor’s 500 index is down double digits this year and might be going lower.
As a result, you may have noticed that the investment balances in your IRA are declining.
My performance has been marginally better than the index. But that is not great. After all, being a slightly tall person in a land of dwarfs does not make you a giant.
So, like many people, market declines make me wonder about my investments and whether I have been a fan of certain assets and not an objective judge.
It is an important question.
So, let me first explore that phenomenon related to sports and then see what aspects of this mode of thinking can spill over into your money decisions and investments.
SPORTS TEAM FANDOM
Being a sports fan is a lot of fun. There are a lot of reasons why people become fans:
- Security and belonging–being a fan makes you part of a “club.” There is a natural bonding with others who feel the way you do. You feel joys and sorrows, ups and downs. Often kinship develops between fans too
- The social aspect—every time there is a game, it is not just a sporting event. People get together and talk about the team’s prospects, favorite players, etc. And they don’t just watch and chat. Often, eating and drinking festivals break out too. What could be better?
- Pleasant feelings–our brains release chemicals that the body craves at sports and social events. It is part of the bio-chemical fan experience. And especially if your team wins, you want to have those pleasant feelings again and cheer your team on to victory.
- Passion–It is important to feel passionate. Sports activities are outlets for emotions.
- Bask in reflected glory—when our teams do well; we love it. And we feel it reflects on us too.
- Resort to visual cues- to hold onto memories, some fans purchase sports memorabilia, wear team colors, jerseys, etc.
I have never gotten to the point where I dye my hair my team’s colors.
INVESTING AND BEING A FAN
Fandom exists in the investing and money world too. Here are a just a few aspects that you might notice if you follow the markets:
- Personalities—many of the wealthiest people in the world have cult-like followings. For instance, the most obvious is the world’s richest man—Elon Musk. His achievements, from making electric cars to exploring space, are astonishing, and people invest in his venues to show confidence in him.
However, there are others who are financial cult-wanna-be’s, which are not the same thing at all. Some don’t sell you on a vision, they just sell you.
- Investment theories—these also get adherents, detractors, fans, and anti-fans. The most common two approaches are investing for growth or value. And you can make money in both. But there are other theories populated by fans: indexing and momentum investing, for instance. There is nothing wrong with either, but they have their supporters and detractors.
- Groups—some groups espouse theories that have fan-related underpinnings. Most prominent is investing in “meme” stocks, which involves betting against hedge funds that bet that certain stocks will decline. So, essentially this is an us versus them mentality that involves betting against institutions deemed to be unjust and inflicting unwarranted pain on specific companies. And, of course, some individuals have not only exercised what they feel is a moral imperative but have gotten rich in the process. It is always wonderful when you can be both moral and rich at the same time.
THE DANGER OF BEING A FAN OF YOUR INVESTMENTS
Your investments and money management principles don’t root for teams or concepts. Success can come from many strategies. But being a fan has more than a few dangers.
- Us vs. Them—deciding your capital allocation is not like rooting for the home team. There is no us or them.
- Groupthink—similarity of opinions and worse. Sometimes there is an implied sense that your fan group is smarter, more moral, more objective, and more successful than others. Maybe. Maybe not.
- Intellectual laziness—the fundamental tendency of a sports fan is to take sides. Money is different. You cannot lose your objectivity without having the possibility of doing something that costs you.
Put another way, being a fan when managing your money is a bit like making a law to decree that it must only rain at night.
Laws can be correctly applied in some situations–but don’t apply in others.
BIAS AND MISPERCEPTION/MY RESULTS
Some of the most profound thinking on bias I have come across is from Charlie Munger. You can read about his treatise on the subject here.
Munger believes that it is helpful to force yourself to acknowledge the virtues of things and people you dislike. And that negates the weaknesses of fan-based us versus them thinking. Reminding yourself to do that is a good way to head that bias off.
MORE MUSINGS: THE GENERAL RISE OF FAN-BASED THINKING
So, why is fan-like thinking on the rise?
My opinion is based on no objective analysis: I feel that complexity is killing us. As a result, we look for simple, understandable answers, and along the way, those who support us too.
But it is essential to use that mode of thinking in the proper context. That is why the whole idea of using a fan methodology on important questions like investing is risky.
Don’t get me wrong. I like simple answers too. Among other things, analyzing complexity is exhausting. So, running toward a quick, simple solution is beguiling, especially when people you like and admire are doing the same thing.
SO, WHAT ABOUT MY RESULTS?
You may be asking, well, if this blog’s author was any good, why has he kept stock holdings worth less than they were at the beginning of the year? Isn’t he just a fan of stock investing?
Well, yes. But stocks are an excellent investment over a long period of time, notwithstanding ups and downs (like now). So, I will stick with them, considering I am keeping them over a lifetime.
And yes, I did review my holdings and question my criteria for keeping them, how much cash to keep on hand, etc. I made a few changes. I try to be an objective judge.
I recommend that sit down with your financial advisor/fiduciary and be objective too. It is a good idea with as much uncertainty with war, inflation, covid, and other issues as there is now.
Postscript: a full review of my holdings shows that other assets have offset my value declines in the stock market. Yay for diversification.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Jimmy Conover
License: Unsplash