RS Weekly Update - Munger, Perception and New Buys
Picking up where we left off last week, here is tendency #16 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.
Tendency #16 – Contrast-Misreaction Tendency
This is one that we all have to deal with from time to time. We as humans have to rely so often on perception; however our perception may not necessarily be the reality. This tendency is best described by a number of simple examples Munger uses:
• You go ahead and opt for the $1,000 leather dashboard for your new car simply because compared to the $65,000 you just spent on buying the car it seems like an insignificant amount;
• A woman with terrible parents “settles” for a mediocre at best man simply because when compared to her parents he is of a much higher standard;
• Vendors set prices artificially high for a period of time so that when they drop the price consumers then feel like they are getting a deal when in fact they aren’t.
These are just a few examples but they get to the crux of the matter that often we will settle for a solution or answer simply based on our comparison with another situation. At best this is lazy; at worst it can be fatal and we have to work hard to avoid it. Using mental models and checklists are ways around scenarios like these, but we have to also be honest with ourselves and adhere to the practice.
In investing if we aren’t careful we can suffer from averaging down, or buying more of a position simply because the price is lower. “Well I bought the stock just two weeks ago at $30, but today it’s only $15 so hey I must be getting a steal!” Not so fast. Have you checked to see if your thesis is still intact or if any news has come out to warrant the drop in price? Was your valuation even reasonable in the first place? How about when a lying, thieving CEO is dismissed and replaced with someone with only moderate skill levels and experience? Are you about to say that comparatively speaking this guy is way better so we must be better off now? If so, then you need to rethink it entirely.
Some final words of wisdom from our good man Ben Franklin that Munger often looks back to: “A small leak will sink a great ship.” Indeed it will, so pay attention to all the leaks no matter how big or small they may be.
It was just too good a deal to pass up, so I’ve added a little Berkshire to the portfolio. Check out my take here: http://bit.ly/mRWlCX
Yep, two in one month. Global retailer Gap just looks like a value proposition worth taking a chance on. Check out my write-up here: http://bit.ly/mma687
After reading “Dethroning The King” I have been looking a lot more into Anheuser-Busch InBev (NYSE: BUD) lately and I like what I see.
Straight from the Onion
Special thanks to Jacob Roche for linking me to this one; a resounding no: http://onion.com/lk69uf
Jason owns shares of Berkshire Hathaway