Tuesday, 6 September 2016

Lessons from Charlie Munger-VIII

Dec 15, 2011


In the previous article, we had discussed how you can make consistent stock returns by understanding and avoiding the trap of inconsistency-avoidance tendency. Today, we shall discuss a very basic tendency that often drives our thoughts and actions and is very relevant to our behaviour in stock markets. And in doing so, our aim is to help you identify dysfunctional behaviour patterns and thinking errors that may be hampering your stock market investments. 


Envy / jealousy tendency 

What do the words envy and jealousy bring to mind? Whatever they bring to mind, we often try our best to dissociate ourselves from them. Such is the taboo attached to these emotions that we do not want to link our behaviour and actions with them. Yet these very emotions are so innate to human nature that it is almost impossible to get rid of them. More importantly, given the crucial role that these emotions play in the human world, you could risk ignoring them at your own peril. 
So let's ponder a bit about the roots of envy and jealousy. Charlie Munger gives a very interesting evolutionary perspective on this, "A member of a species designed through evolutionary process to want often-scarce food is going to be driven strongly toward getting food when it first sees food. And this is going to occur often and tend to create some conflict when the food is seen in the possession of another member of the same species. This is probably the evolutionary origin of the envy/jealousy tendency that lies so deep in human nature." If these lines sound very geeky and clinical, let us elaborate in simple words. Food is very basic to the survival of any life-form. Without nutrition, no life can exist. So the chief life-long struggle of any creature is about securing the supply of food. Throughout history, the availability of food has dictated the survival or extinction of species. Given the utmost importance of this vital resource, a creature will be instinctively driven to possess the food the moment it notices it. The conflict arises when it sees food in the possession of another creature. This explanation, though difficult to verify accurately, does broadly explain the origin of envy and jealousy. And it extends to all other things other than food as well.


Envy and jealousy tendency in stock markets

It is often said that stock markets are driven by greed and fear. Sounds pretty neat, isn't it? But legendary investor and Charlie Munger's 'Siamese twin,' Warren Buffett, has an important interruption to make here. He very wisely points out, "It is not greed that drives the world, but envy."A patient contemplation of this sentence will reveal to you its utmost significance. While 'greed' refers to an excessive desire to possess something, 'envy' is a desire to possess what the other person is possessing. And more often than not, greed is fuelled by envy. A lot of times, we desire something simply because we see someone else enjoying it. Such human tendency of envy and jealousy is very well orchestrated in the stock markets, albeit in overwhelming proportions. Everyone is here not just to make money, but to make more money than what the next person is making. Comparison and competition is intense, creating a perfect recipe for jealousy tendency. Let us give you a couple of examples to elaborate our point:

a) Mr Gupta made 25% annual gain on his stock portfolio in 2007. He is quite satisfied. But then he learns that his colleague Mr Agarwal made a whopping gain of 300% that same here. Now Mr Gupta is distressed and feeling left out. His 25% gain now looks paltry in comparison to Mr Agarwal's triple-digit gains. He gets desperate to replicate his friend's success. In his frenzy, he ends up playing some stupid bets and loses quite a lot of money. 

b) Mr Rao has made a lot of money on certain stocks in recent times. Mr Desai, whose portfolio hasn't fared too well, is secretly disturbed, or in other words, jealous of his friend's prosperity. He decides to do exactly as his friend does, so that he would be as successful as him. Around this time, Mr Trivedi is extremely bullish on silver and places big bets on silver futures. Mr Sharma is tempted to copy. Despite not being in a very sound financial position, he jumps on the bandwagon and ends up burning his fingers. 

It is clear that it was jealousy that motivated wrong behaviour in both these cases. The list of such cases is long. The important point to take home is to not let such negative emotions affect your investment decisions. But isn't it a little too difficult to not feel bad if your friends and colleagues make a lot more money than you do? It is indeed difficult. So the best antidote in such a case is to avoid discussions that would trigger feelings of jealousy. In fact, some of the best investors in the world keep extremely low profile and keep their discussions limited to stock ideas and business fundamentals. In the absence of such external disturbances, they are able to make more rational investment decisions. 
We will continue to discuss some more thinking errors and psychological tendencies that can affect your investment decisions in the subsequent articles of this series. 

https://www.equitymaster.com/detail.asp?date=12/15/2011&story=1&title=Lessons-from-Charlie-Munger-VIII

No comments: