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March 2011

Recs

5

RS Weekly Update - Munger Says Be Curious, Invest Better!

March 25, 2011 – Comments (0)

Dear Fools,

Picking up where we left off last week, here is tendency #6 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #6 – Curiosity Tendency

This is one short but sweet and can be summed up as this: Curiosity is a good thing. It’s funny, as a kid I can remember being so curious about everything. They way things worked, why my parents did what they did, what we were learning in school and why. I’m not as curious by nature now as an adult, but I still am to a degree. Now I see it in my two daughters, always asking the same questions. And of course the most popular one is “Why?”

Curiosity has grown and evolved with man. Munger makes the point of looking first at Athens and their developments in math and science. This all came from their curious nature. Fast forward to the Romans and while they contributed relatively little in the way of math and science per se, they used this knowledge in their development of roads, aqueducts and other forms of engineering. So the curiosity of their predecessors enhanced the ability of their curious nature which ultimately resulted in progress. And so it goes.

Do we need to be curious in investing? Well I would argue that in order to be a successful investor over the long-haul, curiosity is essential. Digging in to companies, competitive advantage, valuation, market conditions, trends and progress; this all requires a curious nature to uncover. Otherwise you’re just throwing darts.

Ultimately, the more we learn the more useful our curious nature serves us. Even better, it can help us overcome any shortcomings or crises that may arise from any of the other psychological tendencies that may pop up. The moral of the story? Stay curious Fools!

Foolishly,

Jason (TMFJMo)

Higher One

There’s a new addition to the portfolio this week. Financial services provider Higher One has finally gotten into buy territory, so here’s my take: http://bit.ly/i6GesV

Starbucks

CEO Howard Schultz makes a big promise for Starbucks: http://reut.rs/e7B2dn

Activision Blizzard

This should result in better tracking of sales for ATVI; especially considering how much digital sales contributes to their overall revenue today: http://bit.ly/hFI117

Straight from the Onion

I knew there was more to it! What a way to get intelligence: http://onion.com/h3eNEB

Jason owns shares of Activision Blizzard  [more]

Recs

6

Talking About Munger and Bad Habits

March 18, 2011 – Comments (2)

Dear Fools,

Picking up where we left off last week, here is tendency #5 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #5 – Inconsistency-Avoidance Tendency

Human beings are stubborn. That is, once we get going with something, it’s hard to change. Whether it be a political belief or a bad habit, new ideas are typically not accepted so easily because they’re inconsistent with the ideas we already have in place. To put it bluntly, we are creatures of habit. And to take that one step further, we are also creatures prone to collect bad habits over the course of our life.

While this observation may be tough to accept for some, I think Munger is spot on. I know I’m a creature of habit. I don’t know if part of it is that I’m too lazy to change or I just really know what I like and don’t care about much else, but it’s true. But isn’t this scary? Munger makes a great reference to Dickens’ tale A Christmas Carol on this point when he says:

When Marley’s miserable ghost says, “I wear the chains I forged in life,” he is talking about chains of habit that were too light to be felt before they became too strong to be broken.”

In other words, we need to be careful of this tendency, or else before we know it we’ll be too late to change anything at all. And that could be fatal in life and investing. (I’m on the fence as to which one is worse.)

So why don’t we change our thinking even after there is enough evidence to prove that we may be wrong? Munger refers to three evolutionary points:

•  It facilitated faster decisions when speed was essential to survival;
•  It facilitated survival advantages gained by cooperating in groups (it would be more difficult for groups as a whole to make it if everyone was always changing their minds); and
•  It was simply the best solution to get us to this point in time as a species.

As an investor there are all sorts of bad habits we can get into. Too much trading is one. Taxes and other frictional costs can really eat away at gains over the course of time. And if you think about it, over-trading is more or less a form of market timing; basically flipping a coin. It’s a lot easier to perform diligent research and invest wisely for the long haul. That’s not to say you should never sell, but you should certainly be aware of when and why you would sell. In other words, have a sell strategy in place.

Another bad habit could be investing in things we don’t understand (while denying that we in fact don’t understand them). Rather, take the opportunity to learn something new and decide whether or not it is welcome in your circle of competence. To paraphrase Buffet, there is nothing wrong with throwing something in the “too difficult to understand” pile.

The greatest takeaway of all from this lesson is that bad habits are a lot easier to not start at all than to stop. Munger in this case aptly refers back to one of Benjamin Franklin’s most recognized quotes from Poor Richard’s Almanack "An ounce of prevention is worth a pound of cure.” No doubt this is true.

Foolishly,

Jason (TMFJMo)

Houston Wire and Cable Company

A nice earnings release from Houston Wire; they’re on fire!: http://bit.ly/htsXuu

Starbucks

Now Starbucks and Peet’s are in talks. Will anything come of this?: http://reut.rs/i0RrxY

Investing Lessons

Lesson in how to be an SEC filings junkie: Know where to go! EDGAR is his name and filings are his game. Here’s where you get started: http://www.sec.gov/edgar.shtml

Straight from the Onion

This actually sounds about right: http://onion.com/eCQVBi

Couldn’t resist the two-fer this week; this one’s funny too: http://onion.com/ftw62x   [more]

Recs

5

Another Lesson With Charlie

March 12, 2011 – Comments (1)

Dear Fools,

Picking up where we left off last week, here is tendency #4 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #4 – Doubt-Avoidance Tendency

Have you ever noticed how whenever we have some kind of decision that needs to be made, we tend to just want to get it over with? Regardless of the outcome, and many times when the situation becomes more and more stressful, we as humans seem to be programmed to just want some finality in the situation, whatever it may be. Such is the nature of the Doubt-Avoidance tendency.

Think about a judge and/or jury for a moment. So powerful is this idea of just reaching a decision and removing all doubt that we have it set up in our judicial system that deciders must take the time to deliberate; lest they reach a decision based purely on emotion and no fact in the matter.

So why do we just want finality? Typically it’s a cause of one of two triggers (or some combination of the two):

•  Puzzlement; and
•  Stress

A great example in investing can be seen when news hits a stock we own. Specifically in a situation where some news has hit a stock and its price is falling as you look at the screen. What do you do? Is there enough time to make an informed decision? Should you hold or sell? Or buy more? It’s not an easy answer at all. But being well informed on the stock in the first place can help check this. Imagine if you saw some news blurb that came out and you could immediately recognize whether it was a valid threat or just “noise” as Taleb might call it?

Therein lies the importance of knowing what you’re invested in and keeping a record of why you're invested in it. Sometimes it’s these moments of puzzlement and stress that open the window of opportunity for us as investors.

Foolishly,

Jason (TMFJMo)

Starbucks

It’s official: Starbucks and Green Mountain are hooking up. Granted the terms are still under wraps, but there are plenty of implications to talk about, over coffee of course. http://bit.ly/gv46Ne

Straight from the Onion

I never really got the whole Charlie Sheen thing anyway: http://onion.com/hvRwvR   [more]

Recs

6

Charlie Munger Continued

March 06, 2011 – Comments (0)

Dear Fools,

Picking up where we left off last week, here is tendency #3 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #3 – Disliking/Hating Tendency

Just as with the loving and liking tendency addressed last week, the disliking/hating tendency is something that is with us at a very early point in life. In fact Munger observes that we are born with these primitive emotions. The growing popularity of smear campaigns and negative advertisements in American politics for example shows that some people just have a natural talent for it; like they’ve been working at it since birth.

So how does this tendency manifest itself? Three primary ways are:

•  We ignore the positive virtues in the things or people we dislike;
•  We dislike people and things that are even associated with the object of our dislike; and
•  We distort the truth; bend reality to conform to our dislikes and hatred.

The past few years have created an environment where it has been really easy to hate. From polarizing politics to the financial crisis and recession that followed, people have really taken to hating and disliking someone or something. We need to assign blame, so we look for the quickest avenue and let ‘er rip.

But just because banks screwed up, are all banks bad? Are all banks awful investments? Of course not. Granted they made it a lot more difficult to find the good ones, but they’re out there. And how about the Gulf spill? An awful and tragic event no doubt, but are all oil companies bad? Are they all bad investments? Are you a bad person for investing in oil companies? My answer to all three (predictably I’m sure) is no. What’s more, as investors it was a wonderful time to take advantage of the blanketed disapproval and find the winners among them. Opportunistic? Yes. Do I hate what BP and the responsible parties caused? You bet I do. And that’s the point I think. We as humans will hate. We can’t help it. But as investors, we can train ourselves to control these negative emotions and take advantage when the opportunities do arise.

Foolishly,

Jason (TMFJMo)

GulfMark Offshore

In case you missed it, here’s my video update on GulfMark and news from the Gulf: http://bit.ly/eDXDs7

Starbucks

The coupon future is here: http://yhoo.it/fktdAw

Straight from the Onion

Why were they there in the first place?: http://onion.com/gaoAOP   [more]

Recs

14

The Continuing Education of Charlie Munger

March 05, 2011 – Comments (0)

Dear Fools,

Picking up where we left off last week, here is tendency #2 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack:

Tendency #2 – Liking/Loving Tendency

As human beings, we spend the better part of our lives liking and loving as well as wanting to be liked and loved. And there are some interesting side effects of this tendency that can affect the way we go about our daily lives:

•  We tend to ignore faults with things we are drawn to and simply aim to please in whatever way possible, despite these faults;
•  We tend to favor or be partial to people and things that we associate with the things that we like or love; and
•  Love can make us change or distort the facts to match up with the world as we want to see it.

It’s easy to live in the moment, especially in the euphoria of love. However falling prey to these tendencies can distort reality and cause real problems. Legendary investor Peter Lynch reminds us to never fall in love with a stock. It doesn’t know that we own it, so falling in love with it only makes us susceptible to bad judgment. The tendency will be to only frame things positively and never consider the negatives. And love will make you change the story as you go along, possibly keeping you in an investment for the wrong reasons.

Remaining detached enough from our investments to look at them objectively is a crucial skill to becoming a successful investor. It is much easier said than done; it requires attention and practice in order to get better. But it’s a key step in becoming a great investor and well worth the time and effort. So seek out contrary opinions and challenges. And when considering investments, understanding how they can fail gives us a much clearer view to how they can succeed. Like Munger and Buffett love to say, “invert, always invert.”

Foolishly,

Jason (TMFJMo)  [more]

Recs

12

Philosophy of Charlie Munger

March 04, 2011 – Comments (1)

Upon the advice of my Foolish friend blesto, I am posting this from my Rising Stars portfolio discussion board. Just to give a quick background, I put out a weekly update every Friday on the board and Tweet it out too. What follows here is my first in a series of updates where I am taking a look at Charlie Munger's take on the psychology of human misjudgment. There are 25 tendencies and I will cover one per week over the coming weeks. I started a few weeks ago, so I will post the others I've already done over here in order to "catch up." From there I'll post them as I get them out each week. The point of this is to think and (hopefully) discuss how this can relate to investing, so don't be scared to throw down some thoughts here...after all that's what a blog is for, right?  [more]

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