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RS Weekly Update - Munger, Endowment & Review



May 18, 2011 – Comments (0)

Dear Fools,

Picking up where we left off last week, here is tendency #12 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #12 – Excessive Self-Regard Tendency

Have you ever had the feeling that when something becomes yours it’s just automatically better? I’d be willing to bet we all have at one point or another. It’s what psychologists refer to as the “endowment effect” and it’s a powerful force.

A pretty funny example can be seen in lottery tickets. So when you buy a lottery ticket, typically you can either have the numbers drawn for you or you can pick them yourself. The thing is that regardless which way the player goes, the odds are essentially still the same and significantly against the player. However because the player can choose his or her own numbers, they attribute more value to their ticket and given the option will even be more likely to buy more tickets. Ever been there?

I’ve been asked the question before, “Would you prefer to meet management of a company you are invested in or not?” Many times people will immediately simply answer “Yes!” Not so fast though Munger would argue. While it is easier to assign judgment once we have met face-to-face, that doesn’t necessarily make it accurate. We can overappraise the worth of our own conclusions based on that very judgment: our own. Rather why not judge solely on the merits of the individual? That is, why not just go with their record of what they have done? The facts should speak for themselves, after all. At the very least as Munger notes, the antidote is to overweight the past record and underweight the face-to-face as the endowment effect is unavoidable otherwise.

Ultimately in investing, we need to force ourselves to be as objective as possible. The endowment effect can surely manifest itself if we’re not. The stock you own is better because you own it? I hardly think so. Try using Munger’s approach of inverting to see how an investment can fail. What has to go wrong for this to end badly? Find the answer or answers to that question, and you may just avoid that bad ending altogether.


Jason (TMFJMo)

The Review

It’s been six months already; here’s my review of the portfolio to date:

Elbit Systems

From the watchlist to the portfolio, check out my latest purchase:

White Mountains Insurance

White Mountains is selling Esurance to Allstate and it looks like a pretty good deal for both:

And here’s another Foolish take on White Mountains’ 15% pop today:

Straight from the Onion

Pretty ballsy indeed:

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