It’s Okay to Disagree with Warren Buffett
Top 5 of the Week of June 12
The guys at Farnam Street blog head up our Top 5 this week sharing English psychologist Peter Cathcart Wason’s research. Collaborative Fund’s Morgan Housel examines our approach to risk. And Allan Roth, writing for ETF.com, explains his opposing stance to Warren Buffett’s—even while being a fan.
David Merkel of The Aleph Blog discusses the effect of ETFs and cash flow. And Jason Zweig, in his Safe Haven blog, reflects on the lessons economist John Maynard Keynes can teach us…
It’s a Numbers Game
- Wason’s experiment demonstrated that the majority of us have a tendency “to confirm rather than disprove our own ideas”
- On being given a set of three numbers—that only the experimenter knew the rule for—subjects, encouraged by getting their previous guesses right, make a confident assumption based on the “evidence” so far
- This inclination to confirmation bias is a widespread human trait, unfortunately—especially when investing—we’re not inclined to seek evidence that disproves what we believe
Can you recognize your own confirmation bias? Share your comments in the section below
The Concept of Risk
- We make a lot of our decisions on taking future risk based on past events, but it is the cultural element which is more persuasive than the analytical element
- As such, an investor’s level of willingness to deal with risk in the stock market is directly linked to the market events they’ve survived in their personal history
- Crashes, high inflation, and recessions all lead us to be more conservative than younger generations who haven’t been through similar experiences—something we should bear in mind
It’s Okay to Disagree with Warren Buffett
- Buffett is known for praising the S&P 500 Index funds, but it has its faults; it ignores many U.S. companies and is very popular, which means new entrants come in at inflated prices
- Also, Buffett is not so hot on bonds advising only “10% short-term government bonds”
- To overcome these, go global with your index fund instead and, be choosy, but know that a good percentage of high-quality bonds serve a vital low-volatility role in your portfolio
Convenience Is All
- There is some confusion among investors that the growth in the popularity of ETFs is distorting the market and driving up the price of individual shares
- Investors want to pay more for a “convenient package of stocks” than single assets, but that doesn’t indicate a connection between ETFs growth and a bull market
- There has been a growing shift in relative price; growth is currently popular while value is not, but it won’t last forever—it’ll shift back
Take a Different Look at the Market
- John Maynard Keynes was an esteemed investor who stayed stoic after the Crash of 1929 and bought stocks as the U.S. was heading into the Great Depression
- He saw the positive outcome in buying stocks that had deviated from market value, as opposed to others who could not see past the adverse effects of the event
- In Keynes’ own words, skilled investors should be working “to defeat the dark forces of time and ignorance which envelop our future” to overcome our emotions during our decision-making
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!
Do you like Top 5 of the Week? Feel free to share it with your friends.
DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.