It was sometime in the middle of 2008 when the realization of a global financial crisis had finally settled on the Indian stock market. I was working on my job as an analyst.
One stock – an Indian engineering major – I had recommended to our clients at the start of the year had fallen around 30% since my recommendation. Not just the stock price, the business had started to wobble. But I closed my eyes to that because my recommendation was now public and many clients would have bought it in their portfolios. To change my view after a 30% cut in stock’s price, however honest I would have been to accept my mistake, would have been a disaster.
Now, this wasn’t just one example that I can think of from that time. There were a few similar such recommendations I and my team had made then.
Some stocks had fallen just because the markets were down. But a few had fallen because their underlying businesses were also bouncing around on a rough wicket.
“What would our clients think of us,” I asked my colleague, “If we change our view now after the stock has already declined? It would hit the trust our clients have on us!” He agreed.
Anyways, cut to June 2012, a year after I had started Safal Niveshak. As part of the StockTalk initiative where I wrote about companies without explicitly recommending their stocks, I covered a leading Indian medical device company Opto Circuits. Here, despite having concerns on its working capital and goodwill on the balance sheet due to aggressive acquisitions, and just because I found the valuations reasonable, I avoided warning readers about the dangers of investing in the stock.
The stock fell sharply after my report on the business, and I got in the defensive mode. Over the next eight months, and after the stock had declined 52% from my report date, I wrote two posts re-explaining my stance on the business.
Despite knowing and communicating to readers that mine was not a stock recommendation but plain business analysis, I was in the “explanation” mode. Why? Because I had made a public appearance with my analysis on the stock, which had started playing dirty games with my mind.
I never owned that stock before, while, or after writing that report. But here is one lesson I learned from this episode, which I could also relate to what I was doing “not changing my mind” in 2008. And that lesson is…
Public Commitments are (Often) Dangerous
Robert Cialdini wrote in his brilliant book Influence: The Psychology of Persuasion –
Consider the organizations dedicated to helping people rid themselves of bad habits. Many weight-reduction clinics, for instance, understand that often a person’s private decision to lose weight will be too weak to withstand the blandishments of bakery windows, wafting cooking scents, and late-night Sara Lee commercials. So they see to it that the decision is buttressed by the pillars of public commitment. They require their clients to write down an immediate weight-loss goal and show that goal to as many friends, relatives, and neighbors as possible. Clinic operators report that frequently this simple technique works where all else has failed.
This was about losing weight, where the person making a public commitment to lose weight would not have to change his or her stance after some time. When you want to lose weight, nothing in the world would lead you to change your stance so that you want to start gaining weight. In such cases, making your intentions public or committing to your goals or resolutions in public is often helpful.
But what about commitments where you may need to change your stance in the future? Like stock market investing? Like weight loss, you fall for the commitment and consistency bias even here. But that is dreadful when the external situation warrants a change in your stance, including sometimes a complete reversal of what you had originally wanted to do.
I have seen this happen with myself like I explained above, and a lot of fellow investors including a few highly successful ones. At certain points in their investing careers, they went publicly vociferous about their stocks and paid a heavy price when commitment and consistency bias sucked them away from changing their minds when the facts changed.
Just because they had spoken publicly about their stocks, and when their stocks started falling because of a negative change in the underlying businesses, they could not adhere to what Keynes once said – “When the facts change, I change my mind. What do you do, sir?”
See what happens inside your brain when you tell your child that you’re going to give her a treat, and she replies, “You promise?” Your brain will now not allow you to reverse course because you have taken a position publicly, and that public is the most difficult to manage i.e., your child.
Speaking Publicly about Stocks is (Often) a Bad Idea
Guy Spier writes in his book The Education of a Value Investor –
Over the years, I began to realize that it was a bad idea to speak publicly about stocks that I own. The issue isn’t that other investors might steal my best ideas. The real problem is that it messes with my head. Once we’ve made a public statement, it’s psychologically difficult to back away from what we’ve said — even if we’ve come to regret that opinion. So the last thing I want to do is walk into the trap of making a public statement about a stock, given that the situation might later change or that I might subsequently discover that I was wrong.
Public commitments, you see, tend to be lasting commitments. And as Spier writes, even when you come to regret your original decision, it’s difficult to change your mind because you have committed to it publicly.
Whenever one takes a stand that is visible to others, there arises a drive to maintain that stand in order to look like a consistent person. We all love consistent people, and always want to look like one. After all, someone who is inconsistent is looked at as fickle, uncertain, or unstable. On the other hand, consistency is a hallmark of being rational, assured, trustworthy, and sound.
Given this context, it is hardly surprising that people try to avoid the look of inconsistency. For appearances’ sake, then, the more public a stand, the more reluctant we will be to change it.
Michael Lewis, author of The Big Short, chronicles the subprime crisis that nearly led to the downfall of the global financial system in 2008. In this book, Lewis profiles, among others, Michael Burry who was one of the very few investors who could see the subprime mortgage crisis coming and thus bought credit default swaps that ended up being highly profitable.
Here is an excerpt from the book where Burry comments on why he dislikes debating his investment positions, particularly related to the credit default swaps (emphasis is mine) –
Inadvertently, he’d opened up a debate with his own investors, which he counted among his least favorite activities. “I hated discussing ideas with investors,” he said, “because I then become a Defender of the Idea, and that influences your thought process.” Once you became an idea’s defender, you had a harder time changing your mind about it.
Coming back to Cialdini, here is what he writes in his book –
Once an active commitment is made, then, self-image is squeezed from both sides by consistency pressures. From the inside, there is a pressure to bring self-image into line with action. From the outside, there is a sneakier pressure—a tendency to adjust this image according to the way others perceive us. And because others see us as believing what we have written (even when we’ve had little choice in the matter), we will once again experience a pull to bring self-image into line with the written statement.
Guy Spier writes (emphasis is mine) –
Instead of discussing current holdings in my letters to shareholders, I now provide a detailed postmortem on stocks that I’ve already sold. This gives shareholders a clear insight into how their money is being invested, but it doesn’t interfere with my ability to act as rationally as possible going forward. For me, this has certainly removed a psychological burden. I’d argue that most individual investors would also benefit from keeping quiet about their current investments since this talk only makes it harder to operate in a rational way. It’s so much easier when you don’t have to worry about how other people might judge you.
You now know the reason why I don’t talk about my stocks publicly. I won’t even if I am paid to.
I have seen the grave pitfalls of doing the same. I have experienced the quirks in my brain that emerge after such public announcements, and which play around with my sanity.
A lot of people think I do not showcase my investments or don’t talk about my stocks “because I am frightened of being mocked at of my average results.” But then, I know that I have nothing to prove to anyone except to myself.
Live with an Inner Scorecard
Warren Buffett has talked about the concept of Inner Scorecard. In Chapter Three of his biography Snowball, he was quoted as saying this –
The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.
I always pose it this way. I say: ‘Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?’ Now, that’s an interesting question.
Here’s another one. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?
In teaching your kids, I think the lesson they’re learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll wind up with an Outer Scorecard.
Let’s face it. Not a day goes by that we are not tempted to glance to the left and to the right to see how we measure up to the people around us and what others think of us, our work, our stocks. But it doesn’t stop there, does it?
We’re tempted to compare our children to other children, our spouse to other spouses, our salary to others’ salaries, our car to others’ cars. It’s frustrating. It’s exhausting. And as Buffett would tell you, it’s a trap.
This act of comparison with others – or seeking validation from others, that is one of the key intentions behind speaking publicly about stocks – is what is driven by living with an Outer Scorecard. And all it leads to is constant frustration because we will never stand up perfectly to what everyone else wants us to look like or be like. Over that, there are many of those who are waiting to criticize and pull us down, whatever we say or do.
Take Bruce Lee’s Advice
“A wise man adapts himself to circumstances as water shapes itself to the vessel that contains it.” ~ Anonymous
The thing that separates us humans from other animals is that we constantly change into new forms, new avatars. We are sad, we are happy, we are emotional, and we are angry. We communicate through different languages, we do different kinds of work, and we deal with different kind of people differently. Effectively, we keep on changing ourselves as per the demands of time and situation.
In fact, success in life depends largely on whether we are able to change ourselves with changing times. If we are flexible and formless – like water – taking the form of whatever is around us, we gain power and succeed against those who rigidly hold on to their ground.
Despite this, when it comes to our ideas – especially when we have only one – we rigidly hold on to them…
…very much like Henry Ford who supposedly said, “People can have the Model T in any colour – so long as it’s black.” This nearly ruined Ford Motors Company in the 1920s, because while Mr. Ford was in love with his idea of “only black Model T” cars, Americans were shifting to bigger, faster, fancier, and brightly painted automobiles.
…or very much like the old “me” who would often not change views on stocks even when the circumstances changed, and paid heavy prices. A lot of this happened because my job required me to go public with my views on stocks.
I have seen several other investors fall in love with their stocks in the garb of “buy and hold”. So they will hold on to businesses, and especially those that are going downhill, and especially those where they have made their commitments public.
They will remain stuck in a status quo mode because they now hate to admit publicly they’ve lost money. They will even put a higher value on the stocks they already own than they would be willing to pay for the same things if they didn’t own them. All this because they’re too rigid to change their ideas, even when circumstances are shouting at them to do so, and because they are facing the public’s glare.
If you have been through such a moment in your own life (or investing life), you would like to read what Bruce Lee has to say –
Empty your mind. Be formless, shapeless, like water. Put water into a cup, it becomes the cup. Put water into a teapot, it becomes the teapot. Water can flow or creep or drip or crash. Be water, my friend.
Charlie Munger says –
The game of life is the game of everlasting learning. At least it is if you want to win.
In fact, a few of life’s great pleasures are to keep learning, letting go of previously cherished ideas, and emptying your mind for new ideas to come in. Then you’re free to look for new ones. And you can only do that when you, like water, are formless. When you don’t live life on others’ terms (Outer Scorecard), but only yours (Inner Scorecard). And, with respect to investing, when you don’t publicly commit to ideas because you may need to change your view in the future.
So, speaking publicly about your stocks can often (not always, but often) lead you to pain…
…but it’s always a pleasure to be quiet and formless like water, my friend.