Introduction (Via DNA India)
Investors have an inherent need to make sense of the world around them, and for that they need stories. Stories that engage and explain. “The initial point I’d make is that our minds work very hard to make sure there’s a cause for every effect. If we see an outcome that we can’t explain, it’s like an itch that’s demanding to be scratched,” says Michael J Mauboussin, the chief investment strategist at Legg Mason Capital Management, the ninth-largest asset management firm in the world, with $703 billion under management as on September 30, 2009. (That is a little over four times the current size of the Indian mutual fund industry).
OK, business news channels and newspapers try and fulfill this investor need for stories. But are they really effective? No, if one is to believe Mauboussin. As he writes in his best selling book More Than You Know – Finding Financial Wisdom in Unconventional Places, “The press sounds a lot like a split-brain patient making up a cause for an effect, and we investors lap it up because the link satisfies a very basic need (of stories)… Read the morning paper explaining yesterday’s action for entertainment, not education.” Mauboussin’s latest book Think Twice – Harnessing the Power of Counterintuition is just out. In this interview he speaks to DNA’sVivek Kaul on the art and the science of investing. Excerpts:
Excerpts (Via DNA India)
In effect, most people see and hear what they want and tune out everything else, you write in your new book Think Twice. How does that affect the process of investing?
This is a big challenge in investing. Once we’ve committed to something, whether it’s a stock in the portfolio or a macro view, we tend to fall for the confirmation trap. That means we seek confirming information and discount or even disavow disconfirming information. Consistency allows us to avoid thinking and acting.As an example of this, I mention the story of the former US vice-president Dick Cheney. A memo was released that revealed his requirements when he travelled to hotels. These included a pot of decaf coffee, four Diet Sprites, a room temperature of 68 degrees, and all televisions on and turned to Fox News, the channel that most closely reflects his political views.
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