Monday, July 9, 2012

Social Metaphysics & Warren Buffett

In my first post (Click Here), I introduced the topic of social metaphysics as defined by psychologist Dr. Nathanial Branden.  I won't repeat the definitions that were developed but wish to continue them in this post.  In short, Social Metaphysics is the process by which men hold the thoughts, values and ideals of others as their source of objective reality.  Social Metaphysicians ask not what is true but what others say is true. 

For example, I constantly hear people say, "Is there a regulation for this or that OR are you certified to do this or that."  Unsure of making their own decisions or learning the answer for them self, they constantly look to others to make judgements.  Often that other person is the government (perhaps my next post will be about Social Metaphysics & Government Reliance).

Moreover, most people believe that the stock market is esoteric or magical.  It's as if some special group of people are the only ones to can decipher its inner workings.  I can assure you it is no such thing.  Anyway, I think you get the point. 

So what does Social Metaphysics have to do with investing.  Well, it turns out quite a bit.  In fact all value investors should be happy that people follow other people.  The herd mentality of wall street is what allows for ridiculous valuations to occur from time to time. 

Because people refuse to trust their own judgement the constantly look to others for guidance and often those "professionals" are similarly misguided.  It's the blind leading the blind.

Social Metaphysics & Warren Buffett

Where I really want to turn this discussion is to investing and Warren Buffett. After I read Buffett's autobiography, "The Snowball", I was struck by his innate self esteem. This is something he calls his inner scorecard. Here is what Alice Schroeder said about Buffett's inner scorecard in an interview:

Schroeder: "In The Snowball, I point out that his father had a 100% inner scorecard about everything. His mother had a 100% outer scorecard about everything. She cared desperately what people thought of the family, of their image. The kids were raised with both of these streams of perception coming in on them. Warren is the product of that. When it comes to investing, business, his principles, his ethics, 100% inner scorecard; he knows what's right. He lives by it. When it comes to how he feels about himself, he is very tender and easily wounded, and other people can make him feel differently. He doesn't have that inner scorecard. And there is a complete separation between the two."

Now if we look back to the original definition of social metaphysics, Mr. Buffett clearly does not suffer from this mental condition. When it comes to investing, he does not care what others think or what others are doing.  He beats to his own drum.  This is perhaps the biggest reason he has been the most successful investor of all time.  He makes his own value judgements and these judgements are often quite rational because they aren't influenced by others (value meaning valuation, not moral judgements).

When it comes to investment decisions, Mr. Buffett is 100% inner scorecard. Charlie Munger is similar to Buffett in this way. Buffett has said many times that Charlie is one of the few people he has met who would tell him his ideas are stupid. Likewise, in most corporations, most junior executives are simply "yes-men" to the CEO.  Dr. Branden would say such individuals lack the sixth pillar of self esteem, namely personal integrity. Buffett and Munger have both personal and mental integrity.  They don't violate their principles in order to stroke a social metaphysician's ego.

It should be abundantly clear why many people struggle when it comes to investing. Amateur investors run around the internet looking for investment ideas from others and that is perhaps why you are reading this blog. Now I'm not suggesting you shouldn't read, you should, but what you read and how you think is much more important.  You should also look to yourself, and only yourself to make value judgement.

Professional money managers, like mutual funds, are generally only concerned with one thing, career risk.  These people run around making sure they don't under perform their peers since that would cost them their job. As Buffett has repeatedly said, nobody ran around and told him what was a good deal.  He had to find those himself.  He just had the rational capacities to make strong value judgements on his own. He wasn't swayed by the lemmings that make the stock market run up and down.

This is a point that needs to be emphasized. Do you buy a stock and then watch what the market does the next hour to see if everyone else agrees with you? How about the next week or month? What if the prices gets cut in half?   Buffett has repeatedly said the market is there to inform you not instruct you, yet countless millions are at the mercy of what other people think. 

What you need to do is independently value a business, buy at a large discount to that value, and ignore the market until it smartens up OR you determine an error in your thinking that led to your valuation.   

A few quotes from Mr. Buffett that relate to our subject.

They (investors) get excited when others get excited, they get greedy when others get greedy, they get fearful when others get fearful... you must detach yourself... from the crowd.

(Speaking about Bill Gates regarding philanthropy)  - He doesn't care if his name is on buildings, I can assure you of that.

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Wild swings in share prices have more to do with the "lemming- like" behaviour of institutional investors than with the aggregate returns of the company they own.

A public opinion poll is no substitute for thought.

Risk comes from not knowing what your doing.

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.

We enjoy the process far more than the proceeds.

You do things when opportunities come along. I've had periods in my life when I've had bundles of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.

Beware of geeks bearing formulas.

The ability to say "no" is a tremendous advantage for an investor.

There seems to be some perverse human characteristic that likes to make easy things difficult. 

Yes Mr. Buffett, it's called Social Metaphysics.

Conclusion

As seen in the quotes above, to be a successful value investor you must be able to:

1) Stand alone & ignore the crowd. 
2) Rely on your own mental faculties and value opportunities independently (then go check what the stock market says).  Be confident in your judgement.
3) Enjoy the (mental) process far more than the proceeds.

Why do people hold the thoughts and values of others above their own?  Mainly, it's to avoid taking personal responsibility.  When you rely on the opinions and ideas of others, it's really easy to blame other when things go wrong. 

I learned this the hard way when I blindly invested in technology back in 1999 and I can assure you it will never happen again.

When you make a mistake once, it's a learning opportunity.  When you make the same mistake twice, it's your fault. 



Best Regards,
Kevin

Disclosure: Long BRK.b

1 comment:

  1. Great post, Kevin. I really enjoyed reading through it.

    - Joel

    ReplyDelete