“Success is a lousy teacher. It seduces smart people into thinking they cannot lose” – Bill Gates
“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so” – Mark Twain
I was in the process of glancing through some of my past investing mistakes and trying to understand what went wrong into these. Fortunately, given the amount of importance we as value-seeking guys put on buying businesses at good enough margin of safety, there haven’t been any big permanent value destroyers – as yet. And remember, we are still in the middle of a kind of rare bull market. Losing money in such an environment takes a lot of effort in itself 🙂
But then this mindset of seeking value quite often leads us to so-called ‘value traps’. Meaning that something might be optically cheap but it is not if someone digs deep enough into it. So, what happens to appear as sizeable ‘discount’ to intrinsic value turns out to be not so. What follows is cheap getting cheaper.
It would be fine if it was something out of the blue coming and eroding its inherent intrinsic value – you can’t help it. But more often it happens to be something which I’m either already aware of or something which is there in the public domain much before I invested into it but I just did not take good enough efforts to understand it.
While the latter problem could be tackled by ensuring one spends enough of time and take requisite efforts, it’s the first one which is a bit scary. It’s like a thief doing his job right in front of your eyes and you are busy preparing ‘chai-nashta’ for this guest of yours in order to make his stay more pleasant & memorable. Sure it would be memorable. We can call this process ‘feeding your biases’.
Why does it happen? Where does all our experience and interpretation abilities sometimes go when we need them the most?
As I think about it, I see two forces acting within me while I’m trying to arrive at a go or no-go decision. Most of the times in such situations my experience instead of helping me is actually pushing me in the exact opposite direction. Something like ‘pattern recognition’ process going all wrong.
Generally, such situations aren’t all black or white. There are a few characteristics which appeal to our investing framework (maybe its the good price tag at which it’s available or maybe its the admirable set of guys who are running it or it may be a once prosperous business available at a fair price) and then there may be some negatives which we know might do the damage but we think that its probability of turning out is just remote. And then one fine day we get the dreadful news delivered to us in the golden envelope.
It happens when those seemingly ‘good’ characteristics override an unbiased assessment which one should be doing. We all have our preferences. Someone might like to own a good 30%+ RoE business and someone else might strive for a 30%+ growing business and then some might like to own something trading at a 30%+ discount to its intrinsic value – all of these are our cravings. And problem arises when these go out of their proportion and starts impacting our decision-making process.
What to do about it?
Let’s try to ‘invert’ this question in order get some more answers. So, now the question is how do you expose yourself to blindspots while investing?
- Maybe you should try to finish your research as fast as possible so that you might overlook stuff
- Don’t pause much to stop and think what you are reading as you research
- Do not seek out multiple sources of information which are there in the public domain
- Don’t ever talk to a person having a view opposite to your own view.
- Don’t use checklists. And don’t ask many questions and hence don’t seek answers
- Ignore the base rates underlying the success of any business in a given industry
- Don’t think about changing business landscape and emerging competition
- Allocate a huge portion of your capital to such situations in order to maximise the impact
- Execute driven by the flow of ‘animal spirits’ within you. Trust your gut feeling.
You might get the idea clear now.
So, it looks like these blind spots are not as ambiguous as we might think. They are fairly clear standing right in front of you but you don’t see it because you have chosen to be blind to it.
Hmm. Looks like its the time to think deeper about some of our current ideas 🙂
But human mind has this inherent resistance to change its perspective once it has created one which it happens to like.
Reminds me of this quote from Munger:
What I’m saying here is that the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in. The human mind has a big tendency of the same sort. And here again, it doesn’t just catch ordinary mortals; it catches the deans of physics. According to Max Planck, the really innovative, important new physics was never really accepted by the old guard. Instead a new guard came along that was less brain-blocked by its previous conclusions. And if Max Planck’s crowd had this consistency and commitment tendency that kept their old inclusions intact in spite of disconfirming evidence, you can imagine what the crowd that you and I are part of behaves like.