Picking up where we left off last week, here is tendency #10 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.
Tendency #10 – Influence-from-Mere-Association Tendency
When given the choice between three coffee makers, is the most expensive one necessarily the best one? It seems that many companies can get away with pricing their goods higher simply to attract those who think this way. What about a watch? Is the most expensive one the best? I tend to think no, but maybe I’m wrong. And how about the way companies advertise? They target folks all the time. You can be as good as Michael Jordan if you drink Gatorade. You can hit the ball as far as Tiger Woods if you hit this Nike driver. It sounds pretty cool, but deep down we all know it’s not true.
Some of our most grave miscalculations come from when we associate something with past success. The easy example here is the guy who gambles in the casino foolishly, recklessly even, yet still wins. Obviously blind luck is in play here. But he believes his success is more than that; that somehow his skill is involved and he continues to gamble in much the same way. Ultimately reality catches up and he loses his shirt. As Munger observes, there are two proper antidotes to avoid falling in the trap of being misled by past success:
• Carefully examine each past success to try to understand what is at play here, whether or not there is any luck or “accidental” success which may be misleading; and
• Look for the dangerous aspects of the new venture which may not have existed when the initial success(es) occurred.
Hating and disliking by association are prevalent in what is known as the “Persian Messenger Syndrome”; basically hating the person who delivers the bad news. Like the old saying goes, “Don’t shoot the messenger.” Stereotypes too are bad thinking from association. Looking at an old person and dismissing them as senile when they actually may be quite thoughtful and lucid. Just because they’re old doesn’t mean they’re senile. Yet many automatically put them in that category, unable to associate them with anything else. And of course prejudice, judging a book by its cover is still quite alive and kicking in our society today.
So whether good or bad, being influenced by association can be very costly in investing. Make sure that the reasons you buy or sell a stock are based on your research and understanding. Not because someone else owns it or because of a status the company may hold society. Follow that road and you may just be associating yourself with unnecessary losses.
Our oil play in GulfMark released first quarter earnings this week. Check out my Foolish take here: http://bit.ly/fFsB54
My favorite trucking company keeps on trucking. Here’s a quick take on their first quarter earnings release: http://bit.ly/igb4Qo
Ameris Bancorp also released earnings for the first quarter and things are looking pretty good for our bank in the South: http://bit.ly/lPgiCK
Straight from the Onion
What would your superpower be?: http://onion.com/grm7gy
Jason owns shares of Ameris Bancorp [more]
Picking up where we left off last week, here is tendency #9 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.
Tendency #9 – Reciprocation Tendency
Good or bad, reciprocity is simply human nature. Key here is good or bad; I think that probably most people, when they think reciprocity, first think about positive things. Someone opens the door for me on the way in, maybe I get the chance to open the door for them on the way out. My buddy buys me a delicious iced coffee today, maybe I get the chance to reciprocate and buy him one tomorrow. But the knife cuts both ways and reciprocity can be as bad as it can be good.
War is a great example. Country A bombs country B and country B then reciprocates the “favor” and bombs country A right back; and on it goes. It’s pretty interesting what history has taught us in regard to reciprocity. Munger suggests that:
• Nature has no algorithm that makes “turn-the-other-cheek” behavior a booster to species survival;
• It’s not clear that a country would benefit from abandoning reciprocating disfavors directed at outsiders; and
• If one considers turn-the-other-cheek behavior good as it relates to outsiders, then it’s going to be a long road ahead.
And it’s no accident that reciprocity is tendency #9; it follows tendencies that it has ties with. Not only does reciprocity tie in with the power of incentives, but it also joins the Inconsistency-Avoidance tendency as it helps cause the fulfillment of promises struck during bargaining or deal-making as well as encouraging appropriate behavior from the people we most expect it (and all others for that matter) like priests, doctors, teachers, etc.
My favorite part of this reading came from the account of a famous psychology experiment conducted by Robert Cialdini. In it, Cialdini asked a group of “compliance practitioners” to go around his campus and ask perfect strangers if they would be willing to supervise a bunch of juvenile delinquents on a trip to the zoo. Approximately one in six people agreed to do this. He then took a different approach to this situation. First he had his practitioners go around asking strangers (different ones from the initial experiment) if they would devote a large chunk of their time each week to the supervision of juvenile delinquents. Not surprising this earned a big fat goose egg; a 100% rejection rate. However he added one follow-up question asking if they would at least consider spending just one afternoon taking a group of juvenile delinquents to the zoo. Upon the follow-up he received one in two positive responses; triple the first experiment.
What this all boils down to is that in the second experiment, Cialdini’s practitioners made a small concession. In turn, the individuals questioned in the experiment reciprocated with a small concession as well.
Do we ever make one-sided concessions in investing? Or is it more of a “you scratch-my-back-I’ll-scratch-yours” kind of thing. It could be argued (and frequently is with great success) that institutions and funds have more consideration and pull with companies versus us individual investors. That’s why it’s extremely important we have a process and understand what qualifies and disqualifies our investments. Know where you’ll draw the line before you even get started. Then you won’t catch yourself negotiating your way through a potentially troublesome situation.
It’s always fun on Market Foolery: http://bit.ly/gEjds5
Looks like I’m not the only one seeing some potential in our little bank from Georgia: http://bit.ly/e1A3qp
For whatever reason, I don’t find myself too concerned with this move by Kraft: http://bloom.bg/hFv5KH
Straight from the Onion
We can only hope for the best: http://onion.com/i7HnIw
Jason owns shares of Ameris Bancorp [more]
Picking up where we left off last week, here is tendency #8 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.
Tendency #8 – Envy/Jealousy Tendency
I’ve been getting a lot of questions lately from my daughters about jealousy. They’re only 6 and 4, so it’s a relatively new concept. But explaining it isn’t as easy as I thought it would be. Munger makes the observation that envy has a lot to do with food; specifically the fact that one person has some when the other person doesn’t. With food being a necessity for life, this makes sense. From there, the evolution of man and just progress in general has given us more to be envious of.
Today, some of the most obvious examples can be seen in envy between friends and sibling rivalries. When you’re a kid and your friend gets the cool new lunchbox (OK, maybe today it’s more like an iPod), it’s perfectly natural to see that and want the same thing. No, it’s not a necessity, but we don’t have to worry as much about that kind of thing today. Food is readily available and there’s plenty of water (relatively speaking of course). And sibling rivalries can run very strong, especially as children. They are simply not mature enough to think differently.
But envy and jealousy are also still very prevalent in our adult lives. When you’re a kid if someone says you’re jealous, it can be somewhat confusing and maybe somewhat insulting, but as a kid you haven’t built up any kind of reputation in the world where this may seem like the ultimate insult; you’re just a kid and your experiences are very limited. But look at something like a law firm where you have a number of senior level partners. Often these partners are compensated the same, thereby eliminating any envy factor (at least in regard to pay). We see the same thing in many of the companies we research as potential investments. Look through the DEF 14A forms and often you will see compensation is geared around sector averages so that companies can all keep it in the ballpark, making it seem reasonable. If accusations of envy and jealousy start flying around, the end result is going to be brutal.
Is it fair when executives are paid multiples upon multiples more than the daily workers in a particular company? Do you think this creates an envy or jealousy factor? I think most certainly it does on some level. The worker making $50,000 a year may look at the CEO who makes $25 million a year and say that he could do the same thing, just sitting around an office all day and eating in the executive lunch room (granted we know most CEOs do a little more than that). I don’t know that they’ll always admit actual envy though. Of course there are workers who will readily admit that they don’t possess the same set of skills and couldn’t take on an executive position like CEO. I don’t know any numbers as to how that breaks down.
Munger makes a good reference to a Buffett quote: “It is not greed that drives the world, but envy.” I believe this is true as I believe that greed is derived from envy. Envy is as old as time itself.
It’s my third buy in two weeks; check out my thoughts on keeping things clean with Clorox: http://bit.ly/fOkxXW
Here’s why Wall Street should love Heartland’s earnings: http://bit.ly/hR7RG8
Straight from the Onion
It’s Masters time!: http://bit.ly/h9NAkN [more]
Picking up where we left off last week, here is tendency #7 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.
Tendency #7 – Kantian Fairness Tendency
This one took me back to my college days. While I majored in economics, I was pretty darned close to a double-major with philosophy as well, so the reference to Kant’s categorical imperative caught my eye immediately. I’m not going to get into the weeds on this one as I spent an entire semester on it and I’m still not sure we ever actually reached any conclusions. But you can learn more about Kant with a quick Google search; he’s interesting to say the least. The basic idea as pertains to Munger is that we have and follow certain rules that, when followed by everyone, result in a pretty fair shake for all involved. They key is that everyone needs to follow along; hence the dilemma.
Do unto others as you would have done unto you. Sound familiar? It should. It’s the Golden Rule and it relates to this fairness tendency. A perfect example (I think at least) is one used in the book with traffic. Think about a big traffic jam where one of two lanes going in the same direction is shut down so that the two must merge into one. Basic fairness dictates that we alternate letting people in. So I let someone merge into my lane in front of me, then the person behind me does the same thing, and so on. It makes perfect sense and when followed, it makes the best of a given situation. But as we also know, it doesn’t always work that way and not everyone plays along.
Say we have a company that has historically paid a nice little dividend to its shareholders as a way to return value. As time goes on, if the company continues to grow and perform well, shareholders may rightly expect that their dividend should grow too. But what if it doesn’t? What if something changes? What if the company decides to do something else with that cash, like buy back shares? On the surface that might seem OK. They are reducing the number of shares outstanding and creating value that way. Or are they? What if they are buying back shares simply to offset the dilution from options gained via compensation packages? That doesn’t seem so fair does it? Or does it? I mean we know that most executives receive options in some capacity as compensation so this happens all the time.
Key here is how much and how often. If it’s something that is done frequently and consistently, well then we have a problem. Then they start looking like that car that decides it’s not going to play along by not letting anyone in. And I hate that car.
There’s another new addition to the portfolio for the month. Trucker Heartland Express has a lot of open road ahead. Read my take here: http://bit.ly/hUcddi
In case you missed it, here’s a short but excellent interview with the co-founders of Higher One Miles Lasater and Mark Volcheck: http://bit.ly/how2tX
And one more for the road; here’s part one of my two-part interview with COO Miles Lasater: http://bit.ly/dUscPc
Straight from the Onion
Tough game; amazing athlete: http://bit.ly/hZf1jf [more]