Wednesday, February 13, 2008

What's in a Name? Not Much...

I am going to use this post to discuss a key lesson from a recent experience involving the whole process of trying to understand things around us.

'What's in a name?' - Shakespeare

Not much. When a company shows up on your screen, on various metrics (div yield, cash yield, high RoE) quite often, you are supposed to take a look at it. Right? I did not for a month. The reason - the name of the company sounded familiar. Familiar to an extent that I concluded that I must have seen this company a few months before and must have had a reason to take a pass, which I failed to recall.

When I actually started looking at the company - it was up 20% from those initial levels. And, even at that price, I found it attractive and could not spot any significant negative which would have justified those depressed valuations.

Let me point out the lesson I learnt using the following quote:

'You can know the name of a special bird in every possible language and yet know nothing about the bird' - Feynman's father to Feynman, as recalled by Feynman. (From memory)

I realized that unless I can claim to be familiar with the characteristics of the subject matter in discussion (be it a stock, mental model, principle...) it is imprudent to start believing that I know something about it. And this exercise of trying to be sceptical, about the so-called knowledge, might be an un-natural process.

In essence, Just knowing the name, when it does not induce inquiry (series of why), might be worse off than knowing nothing because it can trigger a false sense of understanding...

3 Comments:

Blogger VISHNU said...

Hi Arpit,

I have experienced this too...not only with stocks...with people too..

We have a general opinion of someone (lets say Aishwarya Rai) and if you happen to meet that person and your opinion changes dramatically. Sometimes I have changed my opinion about the people after 5-6 meetings..

With stocks..I have a way of avoiding this by putting the name of the company in the last paragraph the investment thesis and never mention anywhere..

Let me know how do you avoid this bias

Regards
Vishnu

4:47 PM  
Blogger Arpit Ranka said...

Thanks for sharing your experience over here, Vishnu...

Talking about my experience with Endowment effect - the tendency of valuing something which belongs to you more highly than otherwise - in the context of security analysis, I tend to initially built a relatively small position in a security, as I have seen that, just following the commitment, the desire to falsify my earlier decision is decently high to allow me a good cross-check of all the variables involved in leading me to my initial BUY decision.

Many a times, things continue to look favorable and I invest more. Sometimes, I feel like developing further insights into the situation to justify my stand, before committing more to it or simply sell out. So, in essence, portfolio allocation decision have been much influenced by this exercise then the outright decision on the favorability of an issue...

When it comes to judging people, as Montaigne says - it is madness to judge things/people by your own capacity as right or wrong - I try and suspend my judgment, especially concerning extremely positive or negative judgments for as long as possible...

5:20 PM  
Blogger Fearless Media.com said...

This is one of the most different articles on investors psychology i have read recently. Hope to see few more such articles.

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1:52 PM  

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