Falling in Love With Investments
Falling in Love With Investments
It makes no sense to engage in short term relationships with investments, but it is also hazardous to fall in love with a company or its management.
On Being Chased by a Goose …
Several years ago, I was chased down a trail by a goose because I accidentally ran too close to its goslings.1 I’m sure this seems ridiculous but at the time I had no doubt that the goose meant business. Geese are monogamous birds that pair up for life to raise their young, and they are fiercely protective. Do geese fall in love with each other and love their offspring? I am not sure if geese feel what human beings would call “love”, but there is little doubt that animals are capable of forming attachments with others of their own species and, in the case of pets, with their human owners.
Few humans would want to live in a world devoid of love, and a good case can be made that humans who are incapable of love have sociopathic tendencies. However, love is an emotional attachment that cannot be ruled by rational self-interest and requires significant levels of trust. Granting others any level of trust obviously involves a degree of risk, but without a baseline level of trust in society and in our personal lives, life would be an unpleasant and degraded experience.
Every writer should know their circle of competence, and I am not qualified to provide advice on how to manage personal relationships other than to be alert to unmistakable signs of deceit and other indications of sociopathy. However, I do feel qualified to comment on the subject in the context of business relationships and investments. In a business context, emotional attachments might provide some ballast during adversity, but also present formidable obstacles to rational behavior.
Liking/Loving Tendency
One of the most important speeches that Charlie Munger ever made involved what he refers to as the Psychology of Human Misjudgment. With no formal training in the field of psychology, Mr. Munger nevertheless identified numerous pitfalls in life that we should all be careful to avoid. Over the years, I have written several articles covering the ideas discussed in the speech, but progress has been slow. In many cases, it has taken years for me to internalize the risks of individual misjudgments to the point where I feel qualified to write about them.
Liking/Loving Tendency is the opposite of Disliking/Hating Tendency which I wrote about in The Futility of Hatred last year. Writing about hatred is much easier than writing about liking and loving because hatred is a completely unproductive emotion that cannot lead anywhere but misery. Therefore, hatred is to be avoided at all costs, and discussion of the subject really involves how we can mentally come to terms with the futility of hating people who have given us ample reason to hate them. We avoid hatred not to benefit those who transgress against us but to avoid destroying ourselves. Hatred is stupid, and the prescription is simple even if it is not easy.
In contrast, Liking/Loving Tendency has positive and negative implications. While it is true that we risk impairing rational thought when we permit ourselves to like or love a person, an institution, or even our country, there are real benefits that accrue when we allow this emotion and enormous detriments for those who like or love nothing at all. We must balance the positive aspects of Liking/Loving with the risks.
“One very practical consequence of Liking/ Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (1) to ignore faults of, and comply with wishes of, the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection (as we shall see when we get to ‘Influence-from-Mere-Association Tendency,’ and (3) to distort other facts to facilitate love.”
Most of us have encountered situations where we interact with an individual who has annoying characteristics that are seemingly invisible to his or her spouse. We might think, “Why in the world would he tolerate this type of behavior!” But the reality is that ignoring faults is one of the hallmarks of love and why love can be “blind”.
Distorting reality to avoid the cognitive dissonance caused by an object of one’s love failing to behave properly is very common. Making excuses for bad behavior is also par for the course. It is easy to fall from giving a reasonable benefit of the doubt into justifying clearly terrible behavior:
“The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. With this ‘feedback mode’ in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved.”
Of course, sometimes admiration is deserved and looking up to an exemplar is exactly what we should be doing as a matter of self-interest. It is interesting to note that both Charlie Munger and Warren Buffett found such an exemplar in Fred Buffett:
“This blessing came to both Buffett and myself in large measure, sometimes from the same persons and ideas. One common, beneficial example for us both was Warren’s uncle, Fred Buffett, who cheerfully did the endless grocery-store work that Warren and I ended up admiring from a safe distance. Even now, after I have known so many other people, I doubt if it is possible to be a nicer man than Fred Buffett was, and he changed me for the better.”
The main lesson we should take from studying Liking/Loving Tendency, at least when it comes to business relationships, is to be smart about the individuals or institutions that we admire even when we know that we will lose some objectivity in the process. Obviously, this is easier said than done, but dealing with Liking/Loving Tendency in business is infinitely easier than navigating the pitfalls in personal life.
In business, I think it is fair to say that admiration and respect can be productive when directed in the right way but outright adulation and unquestioned love is dysfunctional. One might need to drop most guardrails in personal life or risk isolation and misery, but in business we should always retain objectivity.
Cults of Personality
We see the most extreme examples of Liking/Loving Tendency in cults where a charismatic leader so mesmerizes his followers that they are willing to consciously take self-destructive actions up to an including mass suicide. All objectivity is lost in such settings where the leader is endowed with God-like infallibility.
In the business world, there are naturally charismatic leaders who inspire much admiration and loyalty, although it rarely gets to the extremes of actual cults. Again, we are faced with a need to approach the charismatic leader with some nuance. There are certainly charismatic leaders in business who act with enthusiasm due to sincere belief in their companies and missions. Natural charisma leads to loyal shareholders.
All of this is fine up to a point, and the charismatic leader can perform a great service to shareholders if he or she inspires owners to act rationally and with a long-term focus during periods of adversity. Just as Charlie Munger saw Fred Buffett’s example at the grocery store and felt inspired to emulate him, we can benefit from picking the right examples in the business world.
Of course, the flip side is picking the wrong charismatic business leader and allowing a business relationship to grow into adulation and credulity. We can see examples of this when it comes to well-known business leaders with large followings. For example, although they are radically different individuals, both Warren Buffett and Elon Musk have enormous numbers of followers, many of whom are anything but rational when their hero is attacked. If you doubt this, try posting a negative (or even mildly critical) comment about either of these men on Twitter and check your replies.
My own sentiments regarding Warren Buffett and Elon Musk are well known to longtime readers and perhaps best explained in A Tale of Three Acquisitions published last year. I’ve owned shares of Berkshire Hathaway for over twenty-three years and have much admiration for Warren Buffett and Charlie Munger. This brings up the question of whether Berkshire Hathaway is a “cult” and if I’m a “member”.
Is Berkshire Hathaway a Cult?
For over a decade after buying shares in 2000, I attended every Berkshire Hathaway annual meeting. For those who have never attended, it is an event that should be experienced at least once to get a sense of the community that gathers in Omaha every year to hear two nonagenarians expound on business and life for five hours.2
I use the word “community” although some might characterize it as a “cult”. I use the word “community” because of all of the public companies in existence today, I think it would be difficult to select a group of more knowledgeable shareholders than those who gather every year in Omaha. Sure, there are plenty of people at the meeting who know little about business and have some personal attachments to the leaders, but by and large, the attendees have internalized the business message conveyed in Mr. Buffett’s letters to shareholders and other communications over the years.
Still, if I was a member of a “cult”, it is reasonable to conclude that I would be the last to admit it. In my defense, I have written critically about certain aspects of Berkshire over the years and I have based my evaluation of the company on facts and figures laboriously collected and analyzed on a quarterly basis. In a cult, I would have been excommunicated long ago because I dared to question certain decisions of the leaders.
I am very thankful for Warren Buffett and Charlie Munger’s stewardship of Berkshire Hathaway over many decades and cognizant of the fact that they have taken far less compensation out of the business than they could have easily taken. Both Mr. Buffett and Mr. Munger could have net worths far greater than they have today if they had taken reasonable compensation over the years rather than essentially working for free.
In what sort of evil cult would the leaders disadvantage themselves to such an extent and essentially make gifts to their followers decade after decade? The fact that the company’s leaders have worked for free is a financial gift to shareholders and I am personally richer as a result. So, of course I am grateful and admire their actions.
I view Mr. Buffett and Mr. Munger as business exemplars and among the best investors of our times, but I do not view them as omniscient deities, especially in areas unrelated to business. I have had strong disagreements with their political views on multiple topics over the years. I often shake my head in dismay during annual meeting Q&As that delve deeply into politics. And don’t get me started when it comes to their advice on a healthy diet and what constitutes a solid fitness regimen!
Ultimately, I am a shareholder of Berkshire Hathaway because my financial analysis over the years led me to believe that long-term ownership would result in attractive returns and because management’s stewardship as fiduciaries was rock solid, a belief not based on faith but on actions over multiple decades.
From Loving to Hating
Human beings are prone to swing from love to hate when events become severe enough to shatter the psychological edifice upon which their love was based. We can see this all the time in personal relationships because the shattering of love often is accompanied by various types of betrayal that appear unforgivable and deserving of scorn and hatred. Hatred is dysfunctional but part of the human condition.
What is true in personal life is also true in business when a leader who enjoys the personal devotion of followers takes an action that shatters the world view of his devotees to the point where they feel personally betrayed.
For years, Elon Musk was a hero of those who viewed themselves as environmentally and socially responsible. Not only was Elon in the process of somehow solving climate change by selling luxury electric automobiles to wealthy people, but he was also committed to making human beings an interplanetary species. He was viewed as a real life Tony Stark, a modern day superhero who literally might be the key to saving the world. All of Elon’s flaws and lapses as a fiduciary were excused or ignored by his followers because he was engaged in such important work for society.
For a significant number of Elon’s followers, this all changed over the past year due to the train wreck known as Twitter. In addition to claiming to espouse “free speech” principles that ran afoul of the censorship many advocated, Elon took several controversial positions and expressed support for a number of political views perceived to be “right wing”. This was too much for many Tesla customers, including some high profile celebrities who went from extreme fandom to extreme scorn in just a few years. The superhero went to the “dark side” and transformed into a “villain”.
A former adherent to a cause who becomes an apostate is often treated with far more scorn than an outsider who was never a member in good standing. This seems to be the case when it comes to Elon Musk and the political left, although it should be noted that many of Elon’s recent troubles were self-inflicted.
Conclusion
Nassim Taleb’s famous “Thanksgiving Turkey” anecdote tells the tale of the unfortunate bird that considered the human who feeds him daily to be his best friend on earth until reality was revealed in November. The turkey’s sense of love and well-being, so well established due to long experience, is shattered in just a few minutes.
We want to avoid being the Thanksgiving turkey in business and personal life. But it is impossible to live fully without opening ourselves up to a certain level of vulnerability. There are certain risks in life that are worth taking. Liking/Loving Tendency is not a bug but a feature of humanity. If we close ourselves off to all risk associated with establishing affinity with other humans, we forfeit much of what makes us human to begin with and resign ourselves to leading a very diminished life.
There is no easy answer when it comes to navigating this minefield in personal life where the longest lasting relationships are built on unconditional love, with all of its dangers and pitfalls. However, in business, we should never approach relationships with the level of vulnerability that is a necessity in our personal lives.
It is fine to deeply admire our business associates as well as managers of public companies that we do not know personally. But ultimately we must always fall back on a sober assessment of reality if we hope to remain rational. Indeed, those of us who are fiduciaries for our own families would be derelict in our duties if we fail to be aware of Liking/Loving Tendency when it comes to business and investing.
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I didn’t just make this incident up for this article! It is apparently not uncommon in spring.
I no longer attend the annual meetings because the webcast is now available and the cost of traveling to Omaha has become absurdly ridiculous. I remember when I was able to travel to Omaha, stay in a decent hotel within walking distance to downtown meeting events and restaurants, buy meals and See’s Candies, etc for under $500. Those days are long gone. I’m not willing to spend the equivalent of 10+ shares of BRKB to attend a business meeting in person that I can attend for free online.
if you love the wrong thing and don't even know why is the issue. if you love a company or manager who espouses business genius or intelligence and you recognize that it is important and subtley unique in knowing it represents high odds of success it's fine to love it. but be aware if that behavior turns and you might have loved a wolf in sheep's clothing
"... the reality is that ignoring faults is one of the hallmarks of love and why love can be “blind”."
True. And there's a subtlety even in that?
If I recall correctly, while noting my memory's quite hazy here, Helen Fisher, who has long studied the physiology of human (as contrasted with investment/company) love – down to the hormonal and brain scan level – confirmed that sometimes people in love are truly "blind" to a love interest's character flaws or problematic behavior. That is, they in fact ignore them.
But sometimes they also do recognize – and can even accurately describe to an interviewer – at least some of those issues. Yet in the grip of love they still find ways to minimize or rationalize them.