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Talking About Munger and Bad Habits

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March 18, 2011 – Comments (2)

Dear Fools,

Picking up where we left off last week, here is tendency #5 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #5 – Inconsistency-Avoidance Tendency

Human beings are stubborn. That is, once we get going with something, it’s hard to change. Whether it be a political belief or a bad habit, new ideas are typically not accepted so easily because they’re inconsistent with the ideas we already have in place. To put it bluntly, we are creatures of habit. And to take that one step further, we are also creatures prone to collect bad habits over the course of our life.

While this observation may be tough to accept for some, I think Munger is spot on. I know I’m a creature of habit. I don’t know if part of it is that I’m too lazy to change or I just really know what I like and don’t care about much else, but it’s true. But isn’t this scary? Munger makes a great reference to Dickens’ tale A Christmas Carol on this point when he says:

When Marley’s miserable ghost says, “I wear the chains I forged in life,” he is talking about chains of habit that were too light to be felt before they became too strong to be broken.”

In other words, we need to be careful of this tendency, or else before we know it we’ll be too late to change anything at all. And that could be fatal in life and investing. (I’m on the fence as to which one is worse.)

So why don’t we change our thinking even after there is enough evidence to prove that we may be wrong? Munger refers to three evolutionary points:

•  It facilitated faster decisions when speed was essential to survival;
•  It facilitated survival advantages gained by cooperating in groups (it would be more difficult for groups as a whole to make it if everyone was always changing their minds); and
•  It was simply the best solution to get us to this point in time as a species.

As an investor there are all sorts of bad habits we can get into. Too much trading is one. Taxes and other frictional costs can really eat away at gains over the course of time. And if you think about it, over-trading is more or less a form of market timing; basically flipping a coin. It’s a lot easier to perform diligent research and invest wisely for the long haul. That’s not to say you should never sell, but you should certainly be aware of when and why you would sell. In other words, have a sell strategy in place.

Another bad habit could be investing in things we don’t understand (while denying that we in fact don’t understand them). Rather, take the opportunity to learn something new and decide whether or not it is welcome in your circle of competence. To paraphrase Buffet, there is nothing wrong with throwing something in the “too difficult to understand” pile.

The greatest takeaway of all from this lesson is that bad habits are a lot easier to not start at all than to stop. Munger in this case aptly refers back to one of Benjamin Franklin’s most recognized quotes from Poor Richard’s Almanack "An ounce of prevention is worth a pound of cure.” No doubt this is true.

Foolishly,

Jason (TMFJMo)

Houston Wire and Cable Company

A nice earnings release from Houston Wire; they’re on fire!: http://bit.ly/htsXuu

Starbucks

Now Starbucks and Peet’s are in talks. Will anything come of this?: http://reut.rs/i0RrxY

Investing Lessons

Lesson in how to be an SEC filings junkie: Know where to go! EDGAR is his name and filings are his game. Here’s where you get started: http://www.sec.gov/edgar.shtml

Straight from the Onion

This actually sounds about right: http://onion.com/eCQVBi

Couldn’t resist the two-fer this week; this one’s funny too: http://onion.com/ftw62x

2 Comments – Post Your Own

#1) On March 18, 2011 at 10:52 PM, HarryCarysGhost (99.68) wrote:

Thanks Jason,

This is a very nice series your doing on Mr. Munger.

While I was checking out the Onion links read this one-

http://www.theonion.com/articles/consumers-say-recession-changed-way-they-blow-payc,19691/?utm_source=recentnews

... :)

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#2) On March 19, 2011 at 11:59 AM, TMFJMo (69.31) wrote:

Tear coming out of my eyes laughing so hard at that one HCG...thanks so much for the link! So funny and so true... 

Thanks also for the nice words and reading along.

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