Charlie Munger and the Psychology of Human Misjudgment, Continued


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If you know Berkshire Hathaway (NYS: BRK.B) , then you probably know its vice chairman, Charlie Munger -- Buffett's right-hand man. Munger's book, Poor Charlie's Almanack, collects his speeches and musings, including his intriguing thoughts on the 25 tendencies that lead us humans to make really bad decisions. For your benefit and mine, this series will review each of those ill-fated impulses, the errors they create, and the antidotes that can help make us better investors.

Today, we're moving on to tendency No. 2: Liking/Loving Tendency.

How do I love thee? Let me count the ways.
As human beings, we spend the better part of our lives liking and loving as well as wanting to be liked and loved. And there are some interesting side effects of this tendency that can affect the way we go about our daily lives:

  • We tend to ignore faults with things we are drawn to and tend to aim to please in whatever way possible, despite these faults.

  • We tend to favor people and things that we associate with the things that we like or love.

  • Love can make us change or distort the facts to match up with the world as we want to see it.

It's easy to live for the moment, especially in the euphoria of love. However, falling prey to these tendencies can distort reality and cause real problems. Legendary investor Peter Lynch reminds us to never fall in love with a stock. It doesn't know that we own it, so falling in love with one only makes us susceptible to bad judgment. The tendency will be to only frame things positively and never consider the negatives. And love will make you change the story as you go along, possibly keeping you in an investment for the wrong reasons.

What does this have to do with investing?
Remaining detached enough from our investments to look at them objectively is a crucial skill to becoming a successful investor. It's much easier said than done; it requires attention and practice to get better. But it's a key step in becoming a great investor and well worth the time and effort.

Back in mid-2009, the Dow Jones Industrial Average (INDEX: ^DJI) was coming off its nadir when former market darlings General Motors (NYS: GM) and Citigroup (NYS: C) were booted from the index in favor of Travelers Insurance (NYS: TRV) and Cisco Systems (NAS: CSCO) .

That GM and Citigroup are still going through a rough patch today is putting it lightly. GM is still facing a stagnating global economy, rising commodity costs, and the specter of returning from bankruptcy and the "Government Motors" moniker. Citigroup is still faced with risks such as the massive lawsuit filed by the Federal Housing Finance Agency, not to mention still trying to figure out what exactly it has on its balance sheet and dealing with tougher oversight of "too big to fail" banks. But back then, investors who were able to remain detached enough to see that these were two businesses in big trouble -- as opposed to just assuming that they were safe because of their inclusion in the DJI -- were able to save themselves some heartache by cutting bait and moving on.

Of course, this is all easy to say in retrospect; hindsight is 20/20, and so on. But when considering investments, make sure to seek out contrary opinions and challenges. Understanding how they can fail gives us a much clearer view to how they can succeed. As Munger and Buffett love to say, "invert, always invert."

At the time thisarticle was published Motley Fool Stock Advisor analyst Jason Moser owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, Cisco Systems, and Citigroup and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems, General Motors, and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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