Consistency is a hobgoblin
When we own a stock, let’s face it, we love to see articles and reports that confirm our positive view of our investment. It’s human nature. It makes us feel good. On the flip side, we tend not to see or notice negative opinions.
The same is true of our bullish or bearish view of the stock market. We tend not to see information that challenges our view. It’s not that the contrary information isn’t there.
This becomes a serious problem when our view is actually wrong, when we are mistaken. There is something we can do about it. Before we go there let’s flesh it out a bit.
We often discuss investing with friends and colleagues. If they disagree with us (and we are in error) they may be too polite to set us straight, or they may think it presumptuous to suggest we are wrong. It’s actually hard to find people who will say, ‘I think you are wrong and here’s why’.
There is also a risk that we surround ourselves with people who share our views. Or that over time, our collegiality brings our views together. There is the ever present danger of groupthink. If our friends and colleagues share our mistaken view, it is doubly dangerous.
And then often, when we talk to people who disagree, we tend not to listen to understand, but to listen to prepare to reply. We have the urge to defend our views, to think we are in the right.
It’s no better when we are alone with our thoughts. When we are working alone we tend to seize on evidence that confirms our point of view. We will frequently ignore or downplay contrary evidence. We typically fail to consider alternative, more likely explanations.
Behavioral psychologists call this a confirmation bias. Our mind searches for confirming evidence that we are right and shies away from contrary evidence. This bias pops up all over the place.
For example, there is a human tendency to expect that the current state of affairs will continue. We seem to be preprogrammed to believe the status quo won’t change.
“A foolish consistency is the hobgoblin of little minds” are the often quoted words from Self-Reliance, the essay by the American philosopher and essayist, Ralph Waldo Emerson. The essay is Emerson’s plea for people to open their minds to new ideas, avoid preconceptions and false consistency.
Our investment style is subject to the same bias. Our approach to investing may have worked in the past. That doesn’t mean it will work in the future. The world is changing. John Templeton, one of the 20th century’s greatest investors, advised flexibility: his Maxim 19. “Never adopt permanently any type of asset, or any selection method. Try to stay flexible, open-minded, and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and your methods of selection.”
There is something we can do about this hobgoblin. As I see it, the first step is to be aware of the problem. And somehow, you have to keep reminding yourself about it. Even writing this post is a good personal reminder. You can also develop little personal rules to follow.
For example, when I am scanning articles and reports, I have a general policy of ignoring those that have a positive view of stocks I hold and pay particular attention to those with negative opinions. I try hard to keep an open mind and stay skeptical and flexible regarding my own approach to investing. A good dose of humility also works wonders. I am currently a fan of free cash flow yield on price. I have to keep in mind that it is only one way of looking at stocks. I am a happy follower of value investing but remind myself that a particular ‘method of selection’ may not always work. Keep an open mind. If someone disagrees with you, make a serious effort find out if they may just be right.
Want to read more about the issues raised in this post take a look at Part 2: Human Foibles and Investment Decision Making and particularly Chapter 14. Changing our minds
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction.
If you like this blog, tell your friends about it
And don’t hesitate to provide comments