“Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. Therefore we normally will not talk about our investment ideas.”
— Warren Buffett, Berkshire Hathaway Owner’s Manual
One of the interesting aspects of investing is the fact that there are so many people who are willing to discuss ideas in public forums. As Warren Buffett points out, truly valuable investment ideas are extremely rare and discussing them in public could very well hurt an investor’s results. As more people become aware of an attractive opportunity, it is obvious that their actions in the market will erode the price advantage and eventually eliminate it entirely. So why do people feel compelled to go public with their ideas?
There are obviously some benefits associated with publishing investment insights, many of which we discussed several years ago. The ability to test an investment thesis by subjecting it to the scrutiny of other intelligent investors can be quite helpful in terms of “killing an idea”, an approach advocated by Bruce Berkowitz, among many others. Warren Buffett often turns to Charlie Munger as a sounding board for his investment ideas. Even the best investors can benefit from seeking out the opinions of others. The need to clarify one’s thinking to the point where it is intelligible and coherent to someone who is not familiar with a topic can be extremely valuable. However, Warren Buffett and Charlie Munger are on the same “team”. Mr. Buffett does not seek input by exposing his ideas to the potential competition of strangers.
There are obviously many nefarious reasons to discuss ideas as well. An investor can build a position in a company and then write about it in a manner that is designed to increase investor interest. The stock price might then advance allowing the promoter to cash out at a profit. Of course, this is very common on the internet especially when it comes to thinly traded securities, but it is not an unknown phenomenon even in larger capitalization stocks. For this article, however, we put aside the question of nefarious intent and focus only on risks facing someone discussing ideas in good faith.
Less Obvious Risks
It should be obvious that publicly discussing a company that you find attractive and are still planning to buy can only make it more expensive to purchase shares. This is clearly true if Mr. Buffett talks about a company on CNBC but it is also true for small blogs, including The Rational Walk, especially when the company in question is small. However, let us put aside the direct and obvious risks associated with discussing investment ideas and consider some less obvious psychological factors.
Charlie Munger has long been fascinated with the role of standard thinking errors associated with human misjudgment. Mr. Munger’s Psychology of Human Misjudgment provides us with an extensive list of pitfalls to be aware of as we go through life. Human beings have evolved over millennia to make many decisions based on heuristics that can be expected to work reasonably well most of the time, but pose enormous stumbling blocks in certain situations.
When we publicly discuss ideas, we should be aware of the fact that we are most certainly opening ourselves up to the negative effects of several psychological tendencies. These tendencies work against us in many ways and, to make matters worse, we are usually unaware of the fact that we are affected. In this article, we examine just a few of the more important psychological tendencies that could be triggered through a public discussion of investment ideas.
For most people, the state of mind characterized by cognitive dissonance is extremely uncomfortable. We seek to maintain consistent thoughts, beliefs, and attitudes throughout life and when circumstances occur that require us to re-examine a long-held belief, the process of re-examination is often delayed or avoided entirely. Taking public stands on issues in a way that results in a person being identified with a particular idea pounds in that idea in one’s mind to the point where any re-examination becomes even more difficult. The saying that “science advances one funeral at a time” is a manifestation of this tendency.
Consider what happens mentally when one publishes a write-up on a company or gives a presentation in a public setting. The individual becomes associated with the idea to a degree that would not have been the case previously. There is a strong desire to be proven correct, not only in terms of profiting from the investment, but also to gain approval from others. In addition, if other investors have acted on the idea, there is a desire to not let them down even if there is no fiduciary responsibility involved.
After going public with an idea, will it be easier or harder to be open to emerging data or circumstances that conflict with the idea? Obviously, there will be mental resistance and a tendency to interpret new developments in a way that forces consistency with the investment thesis that was presented. This does not mean that it is impossible to reconsider the idea in light of new evidence, but a mental stumbling block has been put up that must be overcome. There are probably many investors who can overcome this without too much difficulty. What they are likely to have in common is full awareness of this psychological tendency and enough self confidence to be able to reassess and discard old beliefs.
Excessive Self-Regard Tendency
The field of investing tends to attract individuals who have, at a minimum, a healthy degree of self-confidence. After all, attempting to outperform market indices that the vast majority of active investors fail to match is the same thing as making a statement that you have greater insight and skill than most other investors. The danger, as with many other vices in life, comes when healthy self-confidence morphs into an uncontrolled ego accompanied by excessive self-regard.
Charlie Munger advises us to counter excessive self-regard by forcing ourselves to be “more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity.” Is it easier to be more objective when one publicly discusses investment ideas? And isn’t the act of making a presentation regarding an investment something that is likely to pound in additional doses of self-regard, particularly when a presentation is well received?
For investors who are well known, a presentation will usually result in a reaction of the price of the investment in question, whether it is an advance due to a bullish outlook or a decline in the case of a short thesis. Knowing that intelligent individuals (presumably) with large sums of money have acted in response to your idea can no doubt be intoxicating and will only add to an already healthy degree of self-confidence.
The flip side comes when negative information calls into question the initial idea. Schadenfreude is probably one of the least attractive reactions when observing the misfortune of others, yet it is exceedingly common in the investment world. Every time a high profile investor has a serious setback, social media erupts in a flurry of sarcastic commentary. An individual with a high degree of self-regard is likely to react to such a development by lapsing into pain-avoiding psychological denial.
Social Proof Tendency
Investing can be a solitary endeavor. The best opportunities are, almost by definition, the ones that the rest of the market has overlooked. Irrational pessimism and short-term thinking have the power to cause market prices to detach from any reasonable assessment of intrinsic value. When this occurs, the intelligent investor has to be willing to act quickly and forcefully to take advantage of the opportunity. In other words, it is important to discard the notion of requiring social proof prior to acting on an investment opportunity.
The ability to go against the crowd might be obvious, but many of us are more comfortable taking action when others agree that our idea makes sense. In order to obtain this approval, one can present ideas in a way that is designed to persuade. The applause at the end of a presentation, positive comments on an article, or a spike in a stock price might be enough for a relatively insecure individual to redouble belief in his or her idea. Of course, by requiring this type of approval from others, the investor has not only potentially eliminated the opportunity but also unleashed the other negative psychological forces we are discussing.
The Lollapalooza Effect
The combined effect of several psychological tendencies is not usually merely additive in nature and can behave more like an exponential function. The tendencies discussed in this article, combined with several other tendencies discussed by Mr. Munger, have the potential to create extreme outcomes in which rational decision making is almost impossible. The act of publicly discussing investment ideas has benefits but also poses very serious risks and this must be explicitly understood and accepted.
There is no doubt that some investors are more likely to be affected by psychological pitfalls than others. However, to some degree, we are all subject to human misjudgment and should strive to stack the decks in our favor whenever possible.
Intellectual honesty requires some degree of self examination regarding how these forces have impacted the psychology of the writer. I will consider two separate cases where I wrote a great deal about a company on The Rational Walk and the impact the writing had on my results from an investment perspective.
Over the past eight years, Berkshire Hathaway has been a frequent topic on The Rational Walk in the form of many articles and two lengthy publications. There is no doubt that writing about Berkshire Hathaway has clarified many aspects of the company in my mind and opened up interactions with a number of Berkshire shareholders.
For the most part, my outlook for Berkshire has been proven correct over time, although obviously the journey was not at all smooth. There were times, such as the summer of 2011, when the general premise of Berkshire being worth far in excess of book value was called into serious question. Although it is doubtful that I would have sold shares at those levels, the public stance that I took probably had a positive effect due to the inconsistency-avoidance tendency.
About a year ago, I published an article that attempts to analyze what Berkshire might look like in 2026. What would happen if circumstances change and Berkshire’s outlook diminishes greatly, possibly due to some problem associated with management succession? Would I have the ability to dispassionately change my mind regarding Berkshire’s prospects in the future? Or would I be too attached to the idea based on my public writing about the company? The truth is that I cannot answer that question today. I would hope that objectivity will prevail over the desire to be proven “correct” in my outlook. But I do not know whether that is the case. If I allow my writing on Berkshire to impact my assessment of Berkshire’s future prospects, it could prove to be a very costly mistake.
Contango Oil & Gas
A better case study of the psychological pitfalls associated with writing about ideas might be Contango Oil & Gas which I owned from 2009 to 2013. Contango was run by a CEO who, in many ways, looked like “the Warren Buffett of oil exploration” and I wrote about the company several times starting in early 2010. However, I did not present a full write-up on the company until September 2012 when the stock price had taken a hit following an announcement that the CEO would take a medical leave of absence.
Bad news associated with the company’s operations was revealed in October 2012 but I mostly explained them away in a follow-up article. In May 2013, the longtime CEO passed away and the company announced a merger with Crimson Exploration, which was covered in another article where I revealed that I had reversed my assessment and sold all shares. Although I took a significant loss on the overall position, the timing of the sale was fortuitous in retrospect as shares have declined over 80 percent since then.
To what degree did writing about Contango Oil & Gas impact my financial results? Taking public stands on Contango over the years pounded in the notion that the company was unique in the exploration and production industry, particularly in terms of the risk management approach of the company’s founder and longtime CEO. The company was a significant percentage of my portfolio and in mid-September 2012, I purchased additional shares shortly before publishing the full write-up on September 22 (this was fully disclosed).
In October 2012, I increased my position and again wrote about Contango (again, fully disclosing the position). I made further purchases in November 2012. Contango, at this point, had grown into a very large position. The company was in a volatile industry and the longtime CEO who was responsible for the differentiation of the company’s approach was on medical leave with a serious illness. There is no doubt that writing about Contango resulted in inconsistency-avoidance. I did not want to be wrong.
On a positive note, when the deal with Crimson was announced, I almost immediately came to the conclusion that management of the combined company would not have any of the attributes that I thought differentiated Contango’s operations and risk profile so I liquidated the entire position at a substantial loss. I published a “mea culpa” article which was very unpleasant to think about and write. Contango remains the largest investment mistake, in dollar terms, of my investment career.
There are plenty of valid reasons to discuss investment ideas in public forums or to make presentations in public. Investors may be seeking out other opinions that can be valuable as part of their investment process. Those who are seeking capital to manage must find a way to get the attention of potential investors. Some people might just enjoy the interaction with other investors. However, we must keep in mind the risks that are being taken when ideas are discussed in public. The risks are not intuitively evident but they are very real. We are all subject to the pitfalls associated with human psychology. The dawning of wisdom is the realization that you too are subject to the tendencies that we might wish only affect “other people”.
The obvious policy is to only discuss investment ideas in public to the extent that doing so is expected to result in some form of net gain, whether it is monetary or intangible. In recent years, The Rational Walk has not published as frequently as in the past and most companies under discussion have not been ones likely to result in a personal commitment of capital. This has been mostly by design and is likely to continue in the future with the possible exception of Berkshire Hathaway.
Disclosure: Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.