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Munger, Fairness and a Couple New Stock Ideas

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April 01, 2011 – Comments (0)

Dear Fools,

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.

Foolishly,

Jason (TMFJMo)


Heartland Express

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

Higher One

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

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