Avoid opinion

Finweek English Edition - - INVESTMENT -

War­ren Buf­fett is prob­a­bly the most quoted ‘mar­ket guru’, with pretty much ev­ery­body hav­ing at least one favourite Buf­fet­tism. One of mine is his com­ment that in a re­sults state­ment there are only t wo things you can be­lieve, the div­i­dend amount and the page num­ber. He un­doubt­edly said it tongue f irmly in cheek, but it does have a large el­e­ment of truth to it. Re­sults are to­tally sub­jec­tive, even within the guide­lines of the In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dards (IFRS) lo­cally and gen­er­ally ac­cepted ac­count­ing prin­ci­ples (GAAP) in the USA.

This also raises a big­ger is­sue, that of the dis­tinc­tion be­tween fact and opinion. I was hav­ing a de­bate last week af­ter the US mar­kets lost al­most 2% on the last trad­ing day of July. A com­ment was thrown out that “the Dow wiped all gains for the year last night be­cause of Ar­gentina”. I re­torted that one half of that state­ment was fact and the other half was opinion. The fact is that the Dow Jones In­dex was now f lat for the year, but the rea­son for the sell-off (in this case the loom­ing Ar­gen­tinian de­fault) was opinion.

This is a very im­por­tant dis­tinc­tion. As hu­mans we’re prone to find rea­sons for events, so a sell-off in an in­dex, stock, cur­rency or com­mod­ity needs to be ex­plained, and we have 24-hour-aday TV chan­nels and mil­lions of blogs, Twit­ter ac­counts and more try­ing to do ex­actly that. But the re­al­ity is that while Ar­gentina may have had some­thing, or even a lot, to do with the sell-off, we don’t ac­tu­ally know what caused a ma­jor­ity of traders and in­vestors to be sell­ers in­stead of buy­ers.

The point is that we in­flate our abil­ity to take lit­er­ally bil­lions of data points and come to a sin­gle co­her­ent rea­son for any event. We re­ally have zero abil­ity to ei­ther gather or in­ter­pret those bil­lions of data points. Ev­ery trade on ev­ery ex­change across ev­ery as­set class is a data point, and col­lec­tively they re­sult in the moves that we’re try­ing to ex­plain.

So, what do we do with this to­tal in­abil­ity to ac­tu­ally know the real rea­son be­hind any given move? Well, we ac­cept this lim­i­ta­tion and try to avoid mak­ing de­ci­sions based on opinion dis­guised as fact as far as pos­si­ble.

One way we do this is to for­get the short-term noise and rather fo­cus on longer-term trends. We can con­vinc­ingly say that the lo­cal mar­ket has been in a bull mar­ket for the last cou­ple of years. We can con­vinc­ingly state that re­tail­ers are no longer the f lavour of the month as they were back in 2010 to 2012. We can also look at re­sults and not get overly ex­cited by a sin­gle data point; we can ac­cept that we’re mak­ing de­ci­sion with far-from-per­fect in­for­ma­tion.

This last point on im­per­fect in­for­ma­tion is im­por­tant as it means that we won’t al­ways be right. Be­ing wrong is an im­por­tant part of in­vest­ing. Sure, we want to be wrong as sel­dom as pos­si­ble, but in an im­per­fect world we will be wrong on oc­ca­sion. It’s our job as in­vestors to f irstly be able to iden­tify when what we thought would hap­pen is not play­ing out, and then we need to be bold enough to ad­mit our er­ror and take cor­rec­tive ac­tion.

At an in­vestor club pre­sen­ta­tion held at the JSE last week­end I com­mented that the best time to sell was never. But that was only pos­si­ble if we or the com­pany we’ve in­vested in never made a mis­take. The truth is we all do, so while the best time to sell is never, when we have to sell we need to ac­cept the lim­its of our knowl­edge. Sell, rather than tak­ing it per­son­ally and hold­ing on in the for­lorn hope that even­tu­ally we’ll be right.

War­ren Buf­fett

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