"You can have comfort, or you can have value. You cannot
have both." - Jim Grant, on CNBC
It is very comfortable and enjoyable to own a company
everyone loves. You can brag about it to your neighbor, bring
it up at social gatherings. But there is usually a significant
price to pay for that comfort - the stock is fully valued. This
is why value (cheap) stocks have historically beaten the
bejesus out of growth stocks. The reason is very simple: Both
love and discomfort are priced into stocks. Love is priced into
fancy valuations, and the hated ones are cheap.
This instinctive comfort-seeking doesn't stop with stocks;
it spills over to the people we choose to share ideas with. As
we tend to look for people who share our views, but we should
do the opposite. During the 2012 Berkshire Hathaway annual
meeting, Warren Buffett said something that really resonated
with me while answering a question about his political views'
impact on Berkshire: "If you are going to choose your friends
and your investments by if they agree with you, you are going
to have a very peculiar life."
Let me tell you a true story (as opposed to just lying to
you). I have a dentist friend who was born in Russia and lived
in Israel and Germany before moving to Denver about 13 years
ago. He is extremely smart, very well-read and a thoughtful
person. However, I have yet to meet anyone with whom I have
disagreed more about politics. His arguments with me are
passionate but also well thought-out and backed up with facts
and his own theories. In the past, I used to get angry at him.
After one of our regular debates, I'd sometimes go into
avoidance mode for several months.
Three years ago my friend invited me to go skiing. Overall,
he is a pleasant person, but I was a bit hesitant. It is a
two-hour drive each direction from Denver to the mountains, and
I did not think I could take four hours of arguing. But that
day I felt extra masochistic, and I went along.
Instead of debating with him, I started to listen. I made an
effort to keep emotions to a minimum; I tried to identify the
specifics of our disagreements, what assumptions both of us
were making. And then I attempted to focus the discussion on
these more precise points of difference. In the end, we each
learned from the other. Our views have not changed much
(political views, like religious beliefs, are nearly impossible
to shift). But we've been skiing almost every winter weekend
since, and in the summer we bicycle together. Now I always look
forward to our disagreements - and we are much closer friends
This lesson applies to investing. When you are long a stock,
you are naturally trying to seek out investors
who share your opinion, and you naturally stay away from those
who have contrary views. This is the comfortable thing to do.
Instead, we should try to do the opposite, to look for smart
people who, after doing their research - a very important point
- come to a different conclusion from ours.
The idea becomes a bit more nuanced. If I talk to a momentum
growth investor about a cheap value stock that has gone nowhere
for years, I know exactly why he'll be avoiding it: There is no
momentum in the stock price. His view will bring me very little
insight. However, the perspective of a smart fundamental
investor who's done thorough research but arrived at a
contrasting assessment might be very valuable.
When we find someone who disagrees, we need to identify
exactly where the differences in opinion lie and then
methodically and objectively try to refute those points. If you
cannot, maybe you are not as right as you thought you were.
In Creativity, Inc., Ed Catmull, co-founder and
president of Pixar Animation Studios, discussed the process of
making movies. He emphasized an important point: All of Pixar's
films - the ones we have come to love - in their early stages
of development sucked (his word, not mine). To get them from
suck to unsuck took a candid (Catmull stressed the importance
of that quality) and collaborative process in which a group of
executives and animators not working on the movie provided
feedback to the ones intimately involved with it.
I suppose that if Pixar's creative team had only been
looking for feedback that they agreed with, Toy Story
and all the other great movies that followed it would never
have seen the silver screen (and my kids' lives would not be
It is psychologically difficult to intentionally search out
opinions that are contrary to ours, but we need to condition
ourselves to realize that a stock doesn't know who loves it or
hates it; in the long run, stock prices will follow
fundamentals (earnings and valuations), and that is what
contrary opinions may help us figure out. • •