"Do you want to be right, or do you want to make money?"
This line, from my erstwhile colleague Joe Magyer, has stuck with me since I first heard it quite a few years ago.
On its surface, it's the same thing — if you're not right, how can you expect to make money?
Look a little deeper, though, and the value of the nuance comes through.
Take, for example, US 'activist' fund manager Bill Ackman. Ackman took a $1 billion short position (from which he'd make money if the shares fell in value) in Herbalife, a US-based maker of nutritional supplements.
As Business Insider wrote:
"For years, Ackman has said the company will eventually crumble under regulatory scrutiny for operating what he has called a pyramid scheme, a claim Herbalife denies."
He spent years — and lost $1 billion — trying to be 'right'. He (obviously) didn't make any money.
I have no interest in getting a call from defamation lawyers, so let me say I have no view on Ackman's claims against Herbalife. But he was so sure he was right, he — arguably — let that get in the way of making money.
Now, it's possible that, as an 'activist' investor, Ackman thought he could also influence the outcome. Maybe he could hope that going public would arouse the disdain of other shareholders, who bought into his theory and sold their shares, pushing the price down. Maybe he thought he could get the regulators to investigate the company, which might have led to punitive action.
Or maybe he just figured, given his stated view on the company, that everything would eventually just come tumbling down.
I was reminded of the Herbalife story when I saw a Twitter thread this morning.
I'm choosing not to include the name of the company, because the problem with examples is that people tend to go off on tangents, rather than stick with the soundness (or otherwise) of a specific point being made!
("Here's why the company is terrible/great", rather than "Here's what we can learn from this man's experience".)
The first tweet:
"$136,000. I did the math today. This is how much money I have lost in the last year and a half of shorting [the company] by using deep OTM puts and other stupid levers.
I am lucky that this is not a major part of my wealth, but this still took time to accumulate. I'm out of the trade."
And the third:
"I wish there was some lesson that I got out of this. Theta is scary? Don't gamble with Options?
I learned that I am hyper competitive, and care more about winning than money. That's why not winning at the trade is most upsetting."
Now, I don't know the person behind the tweet. So I'm not going to pass judgement about him, in particular. I'm just going to offer some thoughts on this style of thinking.
First, it seems to me that he wants to learn a lesson — and that lesson is in the very next line! — but I wonder if he realises it?
Second, the lesson itself. He was trying to win. Trying to be right.
He seems to have left the 'Will I make money?' plane, and had gone straight to 'This trade's outcome is more important to my ego than my wallet'.
(Oh, and a third: I'm still no keener on shorting as a strategy!)
I'm really impressed that he was so open in sharing his losses so publicly. That takes — especially with a six-figure sum involved — a lot of guts.
I just hope he'll learn the lesson he was looking for (and that seemed right under his nose).
And the rest of us?
Well, those lessons apply just as equally to those of us who own stocks as it does to those who are short-sellers.
If I'm honest, I've been in a similar place before. No, not with a short position. And not — thank goodness — with enough money to buy a couple of BMWs.
But I've fallen in love with a stock — at least in part. I love Coca-Cola as a product (No Sugar, if you're wondering). I love the success of Coca-Cola as a brand. Its reach, marketing savvy and business story are fantastic. The problem? I bought (and, unfortunately, recommended) Coca-Cola Amatil Ltd (ASX: CCL) shares on that basis. What I missed was that the company had pretty much already reached its potential here in Australia. Future growth would be slow. But the company's shares still had a growth multiple.
Those last two sentences make uncomfortable bedfellows. Suffice it to say, it was a losing investment, and I should have known better.
Great brands are really valuable. The company's distribution network is unparalleled. But if you're going to pay up for growth… well, that growth potential needs to actually be there!
(In my — partial — defence, I had expected the non-Australian businesses to grow, making up a decent share of the company's growth. But the Australian business was always too big, as a proportion, to let the others have a sufficiently large impact on the results.)
So, I'm not throwing rocks from my little glass house!
But I do want you to learn from my — and his — mistakes.
Companies don't know that you own the shares.
Even if they did, they wouldn't care.
Falling in love with either a company, or an investment thesis, can be hugely dangerous.
None of us makes good decisions when we let emotion cloud them.
Fall in love with a company, and you cease to be an objective investor. That's bad. You might still make money, but the line between skill and luck moves meaningfully toward the latter.
Worse than love, though, is arrogance. Get your ego involved, and the risk moves higher again.
Psychology has shown us that as soon as you start defending a decision, you mentally force yourself even deeper into that view — making it less likely that you'll subsequently change your mind.
Which is fine if we're talking about football teams (even if you non-Roosters fans are on the wrong track!), but when it comes to money, less (emotion) is more.
The successful investor aims to be right, not to win an argument.
See, 'right', at least in investing, isn't an opinion. It's a provable fact.
Over time, a company share price will follow the value of the company. And that long-term value is the definition of 'right'.
You can want it to be different. You can believe it should be different. You can try to convince other people that it deserves to be different…
… all of which is a waste of time. And, in all likelihood, a waste of money.
One of my favourite constructs is "Strong Opinions, Weakly Held"; popularised by Stanford University professor Paul Saffo.
If you're buying stocks, you should have a strong opinion about the businesses you own. You should expect them to be market-beating, based on your assessment of the company's quality and value.
But you should hold those strong opinions weakly.
You should be ready to change the view, when new facts, opinions or events change the balance of probabilities for your investment.
That's hard — almost impossible — to do when you fall in love with a company, or when your ego is so tied up in needing to be 'right'.
(We all want to be right, of course, but that's different.)
The best investors — like the best scientists — are always looking for new evidence, to either prove or disprove their opinions. Then they change those views accordingly.
At The Motley Fool, we try to do just that. We're not perfect, and we still get things wrong, but we try to learn from our mistakes, and keep an open mind. We do our best not to be dogmatic.
Perhaps the final word should go to the great economist, John Maynard Keynes, who (reportedly) said:
"When the facts change, I change my mind. What do you do?"
Fool on!
