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The Continuing Education of Charlie Munger



March 05, 2011 – Comments (0)

Dear Fools,

Picking up where we left off last week, here is tendency #2 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack:

Tendency #2 – Liking/Loving Tendency

As human beings, we spend the better part of our lives liking and loving as well as wanting to be liked and loved. And there are some interesting side effects of this tendency that can affect the way we go about our daily lives:

•  We tend to ignore faults with things we are drawn to and simply aim to please in whatever way possible, despite these faults;
•  We tend to favor or be partial to people and things that we associate with the things that we like or love; and
•  Love can make us change or distort the facts to match up with the world as we want to see it.

It’s easy to live in the moment, especially in the euphoria of love. However falling prey to these tendencies can distort reality and cause real problems. Legendary investor Peter Lynch reminds us to never fall in love with a stock. It doesn’t know that we own it, so falling in love with it only makes us susceptible to bad judgment. The tendency will be to only frame things positively and never consider the negatives. And love will make you change the story as you go along, possibly keeping you in an investment for the wrong reasons.

Remaining detached enough from our investments to look at them objectively is a crucial skill to becoming a successful investor. It is much easier said than done; it requires attention and practice in order to get better. But it’s a key step in becoming a great investor and well worth the time and effort. So seek out contrary opinions and challenges. And when considering investments, understanding how they can fail gives us a much clearer view to how they can succeed. Like Munger and Buffett love to say, “invert, always invert.”


Jason (TMFJMo)

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