Lessons from Charlie Munger-XIV - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Lessons from Charlie Munger-XIV

Oct 12, 2012

In the previous article, we discussed the availability-misweighing tendency and elaborated how it has an adverse effect on investments. Today we shall discuss what investors can do to avoid falling prey to this thinking error.

Playing Charles Darwin

The theory of evolution proposed by Charles Darwin, a 19th century British scientist, revolutionised the way many thought about the natural world. It is worth noting that around the time, a majority Europeans subscribed to the biblical description that the world was created by God in seven days.

Given the vulnerability of the human mind to thinking errors and psychological shortcuts, what led Darwin to think so radically different? As it turns out, the man operated through a mental model that helped steer past several psychological biases. Charlie Munger suggests that taking Darwin's approach could be an effective antidote for availability-misweighing tendency.

What did Darwin do to eliminate biases? It is said that Darwin was a very strong proponent of objectivity. He was known for playing the devil's advocate to his own ideas and hypotheses. So much so that as soon as he would have an idea, he would try to gather evidence to disconfirm it. In fact, he tended to be even more rigorous in his approach with ideas that were particularly compelling.

Let's try and apply this approach to investing in stock markets. Say for instance, there is a certain stock that your friend has strongly recommended you to consider buying. Suddenly, the stock price goes up following a positive piece of news. What would be your reaction? Your friend is optimistic about the stock. The news is positive. The markets too have cheered the news. Isn't there enough reason to run and call your broker to buy the shares? If you would have done that, you would have quite likely fallen prey to the availability-misweighing tendency.

A wiser response would have been to do what Darwin always did: Challenge the merit of the idea. Look for potential risks and concerns that could adversely affect the company. Arrive at your independent view only after thoroughly evaluating the potential of the stock. The ultimate investing decision should be based solely on your understanding and insight and not from borrowed optimism. In short, if you come across a stock that appears to be the market's darling with a lot of media attention on it, play the devil's advocate and consider all possible risks and concerns that can derail the investment. If the idea still holds, it is certainly worth investing.

It is observed that a vital quality that is common amongst all great investors is discipline. It is this discipline that helps them overcome the various thinking errors and biases, availability-misweighing tendency being one of them. A practical way to ensure discipline and to avoid falling prey to this tendency is to prepare an investment check list and adhere to the process in a disciplined manner.

In conclusion, remember what Charlie Munger has said, "An idea or a fact is not worth more merely because it is easily available to you."

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.

Lessons from Charlie Munger Article Series - Previous article | Next | All Articles
Try the Charlie Munger Quiz

Equitymaster requests your view! Post a comment on "Lessons from Charlie Munger-XIV". Click here!


More Views on News

An Important Hurricane Update for Energy Traders (Fast Profits Daily)

Sep 22, 2020

In this video, I'll show you how the extended hurricane season in the US will affect traders in crude oil and natural gas.

Mutual Fund Investors Will Now Be Allotted Units Based on NAV of the Day AMCs Receive Funds (Outside View)

Sep 22, 2020

PersonalFN explains how SEBI's new circular on mutual funds impact investors.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

How Much Money Should an Investor Set Aside for Trading? (Fast Profits Daily)

Sep 21, 2020

In this video, I'll give you a simple equation which you can use to decide how much money you can set aside for trading.

Kotak Standard Multicap Fund: Strategizing Growth with Focused Approach (Outside View)

Sep 21, 2020

PersonalFN's analysis on the features and performance of Kotak Standard Multicap Fund.

More Views on News

Most Popular

Top Investing Gurus of India

Investing gurus are the champions of value investing. These are the people who've mastered the art of compounding wealth from...

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 22, 2020 (Close)