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Like telling a mother her baby is ugly…

“It’s like telling a mother her baby is ugly.”

Stark, but wise, words from a mate and former boss who has a way with them.

It means, in short, that if someone fervently believes something, trying to convince them otherwise is potentially fruitless, and probably going to be received as an insult.

Doesn’t make it wrong, of course, but which mother has ever thought her baby unattractive? And even if she was disposed that way, being told about it is only going to raise her hackles and put her on the defensive.

An ugly baby is one thing, but have you ever tried to disagree with someone about investing?

Is there any more strident believer than an investor in gold?

Have you ever tried to discuss the disadvantages of cryptocurrencies with a Bitcoin true believer?

And the ‘ethical investing’ brigade is so deep into believing that it must be doing good, that they just can’t bring themselves to realise their actions have, at best, a negligible impact.

Why are all these things true?

Psychology, my dear Watson.

See, the things we believe aren’t just intellectual curiosities. They eventually become part of who we are, how we see the world and, in some cases, how we choose to interact with it.

If you’re a pessimist who worries about the end of the civilised world — or at the very least, that some calamity mightn’t be far away — then owning gold becomes not only a logical decision, but the very evidence of that worldview. To criticise someone for owning gold is akin, in those minds, to critiquing their way they see the world. At an extreme, it’s implying “You’re living a lie”. 

How do you reckon that goes down?

The Bitcoin investor is so sure that either governments are going to screw us, and/or that fiat currency is going to be worthless and/or that taxes are immoral, that an anonymous, distributed ledger is the answer. Speak out against it, and you’re challenging their worldview, by proxy. That’s not going to fly.

And the ethical investor wants to have their investment dollars to change the world, so ‘good by association’ rules the day.

Never mind that the company in question doesn’t get a dollar (the swap is cash for shares between two investors, neither of whom gives money to, or takes it from, the company), and that such actions are almost certainly irrelevant in the quest for a better planet.

They feel better because they own the windfarms and someone else owns the weapons manufacturers, but neither company knows — or cares — who owns which shares.

In each case, I’ve attempted, presently and in the past, to make my case. To patiently explain why the worldview might be, well, suboptimal.

Can you imagine how well I’ve been received?

Yeah, I haven’t been invited to a Bitcoin, gold or ethical investment conference in a while.

And I don’t expect that those devotees have changed their minds reading this article, either.

That’s just how humans are.

To be fair, those examples, above are at the extremes. Not every investor in gold, Bitcoin or ‘ethical’ companies is completely set in their ways. But you’ll find elements of truth, throughout.

And before you think I’m just throwing rocks, I’m also aware I have my own biases. Warren Buffett’s Berkshire Hathaway has underperformed the market in the past few years. I think he’ll turn it around. He’s certainly done it before. (I own shares, by the way.)

But is my thinking purely logical? I’d like to think so. I can give you plenty of reasons why, including a reminder that the last ‘Buffett’s Lost It’ headlines were written right before the huge crash of 1999.

But is that reason and logic? Or just rationalisation? I’d like to say it’s the former, but I’ve learned enough to know that it’s also inevitable that the latter has a big hand here, too.

Throw in a little hindsight bias (I knew it!) and some post-fact justification (See, here, after the fact, is why it happened…) and humans can convince ourselves of anything.

But how much was luck? Circumstance? How much was truly inevitable, versus just fortunate?

Which unexpected competitor bankruptcy thrust your company to prominence? What were the odds, before the fact, compared to your after-the-fact reassessment of those same odds?

Remember, of course, that science would never take 1, 10 or even 30 samples and assume they represented a whole universe.

If I’m wrong — or right — about Berkshire, it might be because my reasoning was wrong or right. Or it could be that I’m right for the wrong reasons or wrong for the right reasons.

A few years ago, I recommended shares of Pacific Brands to members of our Hidden Gems service. I thought the shares were meaningfully undervalued.

We sold the shares for a 115% gain, and the market was up only 6% over that period.

Was I right?


I was ‘right’ in that our members made money. Which is better than the alternative.

And I was ‘right’, in that the market did revalue the company to a higher price than we’d recommended it.

But most of the gain came from a takeover by a US clothing company.

If I want to stroke my own ego, I’d say ‘Well, they saw the same value I saw’. That way, I get to be right and bask in the glory of being in the same company as a billion dollar US suitor.

If I was to be critical, I’d say ‘The takeover offer was never part of my thesis. I got lucky’.

Both of those statements, though contradictory, are partly true.

Moreover, it would be disingenuous of me to use it as an example of my prowess, if it was disconnected from the rest of my performance.

I hope, right now, you’re thinking of those exalted ‘experts’ who ‘predicted’ the last great boom or crash. Most of them have been right exactly once. Most of those had made more than a few predictions and have a strike rate below 50%.

So desperately do human beings want to be able to explain events, we’re likely to see connections where none exist and draw conclusions from imperfect or even contradictory data.

Though we’d never admit it to ourselves, most of us would rather be ‘certain but wrong’ rather than ‘uncomfortably uncertain’.

Many people reading this email won’t be able to hear that message, by the way. They just can’t allow themselves the discomfort of ‘I don’t know’.

Don’t believe me? Just look at the polarisation and tribalism of our politics. To be sure it’s the fault of our leaders, but we’re so easily led. They say we get the pollies we deserve, right?

But back to stocks.

As an investor — and our Chief Investment Officer — I try to keep two somewhat contradictory thoughts in my head:

First: The more I learn, the more I realise I don’t know, and the more loosely I hold my convictions; and

Two: I increasingly rely on a process that has, over 8-plus years, delivered more winners than losers, knowing that I could be wrong on any individual call, but have tended to be right, on average and over time.

Oh, and here’s a bonus third: The more tightly someone holds a conviction about a company, the more wary I am of their conclusion, because it’s likely they haven’t left enough room for doubt.

Scientists know that the more you repeat an experiment, the more likely the results are credible (all things being equal).

We’re coming up on our 100th monthly recommendation at Motley Fool Share Advisor.

Is 100 ‘events’ enough to draw conclusions?

I don’t claim to be a practicing research scientist, so I’ll leave that question to others to answer definitively.

I’m also very away that ASIC and the legal eagles tell us that ‘past performance is no guarantee’, and I certainly agree with that. Guarantees about the future are best left to deities.

So I’ll let you decide how much weight you want to give our past performance, in terms of whether or not it suggests a process that is likely to point to success.

But what I am sure of is that listening to prognosticators — or drawing conclusions from less than a handful of datapoints — is almost certainly unscientific.

Maybe it’s a coin toss. Maybe not. 

But I’d rather listen to someone with humility and who leaves room for doubt than a zealot who is sure about everything (and often wrong).

Wouldn’t you?

As Mark Twain (possibly) said: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”


Fool on!

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Scott Phillips owns shares of Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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