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RS Weekly Update - Munger, Influences & Earnings

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April 27, 2011 – Comments (0)

Dear Fools,

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.

Foolishly,

Jason (TMFJMo)

GulfMark Offshore

Our oil play in GulfMark released first quarter earnings this week. Check out my Foolish take here: http://bit.ly/fFsB54

Heartland Express

My favorite trucking company keeps on trucking. Here’s a quick take on their first quarter earnings release: http://bit.ly/igb4Qo

Ameris Bancorp

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

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