Overriding emotional investing by Klarman, Munger and Buffett

Johnny HopkinsSeth Klarman, Study1 Comment

(PHOTO: Source http://www.talkativeman.com/seth-klarmans-recommended-books-on-investing/)

Recently I wrote an article on investing and Behavioral Finance. Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.

The article is called, The biggest problem in share investing, is you! It demonstrates how human beings make terrible decisions when it comes to investing in shares.

So, today to further highlight my point that human beings make terrible share market investors, I’ve found three gems from three of my favorite investors.

Seth Klarman

For those of you who don’t know who Seth Klarman is, according to Forbes magazine:

“Investing legend Seth Klarman runs Boston-based firm Baupost. With $27 billion under management, Baupost is one of the largest hedge funds.”

Here’s the Seth Klarman gem:

“So if the entire country became securities analysts, memorized Benjamin Graham’s Intelligent Investor and regularly attended Warren Buffett’s annual shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads.”

“People would still find it tempting to day-trade and perform technical analysis of stock charts. A country of security analysts would still overreact. In short, even the best-trained investors would make the same mistakes that investors have been making forever, and for the same immutable reason—that they cannot help it.”

We simply cannot resist the urge to chase ‘glamour stocks’ and investment fads!

Charlie Munger

Now onto another of my other favorite investors, Charlie Munger. Charlie Munger is of course vice chairman of Berkshire Hathaway and Warren Buffett’s investment partner.

When I was new to investing, I remember reading this piece from the Wall Street Journal titled, A Fireside Chat With Charlie Munger.

Mr Munger was giving his thoughts on the absurdity of much of the money-management industry:

“Back in 2000, venture-capital funds raised $100 billion and put it into Internet startups — $100 billion! They would have been better off taking at least $50 billion of it, putting it into bushel baskets and lighting it on fire with an acetylene torch. That’s the kind of madness you get with fee-driven investment management.”

“Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top. I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’”

“He said, ‘20%.’ I couldn’t believe it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!’ The investment-management business is insane.”

Greed, is what gets lots of investors into trouble, and investment managers know that!

Warren Buffett

And finally on how to override our emotional urges, as Warren Buffett puts it:

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

It’s not about how smart you are, its about overriding your emotional urges.

These three gems highlight why I prefer to use the investment strategy and screens provided here at The Acquirer’s Multiple. Not only do the screens provide the most up-to-date deep value opportunities but, we’re also provided with a step by step implementation strategy.

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One Comment on “Overriding emotional investing by Klarman, Munger and Buffett”

  1. Solid advice, you need to be quantitatively attracted to a stock and not just let emotions kick in. I think the look-back of “Glamour Stock” compared to Acquirer’s Multiple stock look-back is an amazing statistical example of this. Thank you for the post

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