Munger told the story of the person with an exquisite horse – “it’s got a simple gait, it’s good-looking but occasionally it gets dangerous and cruel” – who asks the vet what he should do. The vet replied: “That’s a very simple problem and I’d be glad to enable you to. The following time your horse is behaving well, sell it.”
As an investor who hedges market risk through “short-selling”, I even have successfully bet against probably the most notable frauds of recent times (Steinhoff, Wirecard and NMC Healthcare) and among the more egregiously valued fads (comparable to electric truck maker Rivian or vegan food outfits Beyond Meat and Oatly), in addition to all 4 banks that went bust within the spring; I spotted the balance sheet issues at Silicon Valley Bank ahead of its spectacular demise.
Although shorting is a skill that even most skilled investors find difficult, applying the identical sceptical discipline to investing decisions is a prerequisite for all investors to avoid costly mistakes. Everyone knows that “a idiot and his money are soon parted” but often think it applies only to anyone else.
While these successful “shorts” may now look obvious looking back, on the time the common opinion, as expressed by the share price, disagreed.
Nobody should ever confuse scepticism (or short-selling) with entering a popularity contest, for true scepticism involves betting against the herd instincts of the group, which most individuals find emotionally uncomfortable.
Jesse Livermore, who briefly became the world’s richest man in the course of the 1929 Wall St Crash, trading only his own self-made capital, observed: “People want the protection of human company.
“They’re afraid to face alone because they wish to be safely included inside the herd, to not be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion.”
The logical consequence of that is that a popularity-seeking personality may be an impediment to the scepticism obligatory for investment success. Although I hope readers will find my views interesting, this writer won’t ever seek to proselytise, since every transaction requires someone with an opposing view to take the opposite side of the trade.
Investing is a novel pursuit in that the very best opportunities come when others vehemently disagree and when your view then proves correct. But unlike in other areas of contemporary society, there aren’t any “subjective truths”: the final result of the talk is all the time determined by the market.
As Munger remarked to his partner: “Warren, if people weren’t so often fallacious, we wouldn’t be so wealthy.”