“The Munger dog. Lovely, harmless dog. The one way, the only way, to get that dog to bite you was to try and take something out of its mouth after it was already there. Any of you who’ve tried to do take-aways in labor negotiations will know the human version of that dog is there in all of us.”---Charlie Munger
Everyone hates to lose.
Loss diminishes self-esteem.
Loss is poignant and figures prominently in song and story.
Think of all the great movies that turn on loss:
“Casablanca:” lost love, lost cause, lost home, lost freedom!
“Citizen Kane:” lost childhood, lost trust, lost morals!
“Wizard of Oz:” lost and can’t get home!
Every salesperson knows how to trade on the fear of loss: “It’s the last one and I don’t know if I’ll get any more in soon.”
A “free trial” or “test drive” can cinch a sale. Prospective buyers, having briefly possessed the treasured item, now can’t let it go without suffering the dread pain of loss and diminished self-esteem.
Fear of loss can lead you to insure against loss that’s never going to happen: like buying “monster insurance” after viewing a monster movie. Or, more realistically, insuring products that rarely, if ever, break.
In market reversals naïve investors rush to sell, to stem the loss, confusing value with price.
“Price is what you pay. Value is what you get.”---Warren E. Buffett
Gambling and Loss
People hate loss so much they chase gambling losses and go broke in the process.
“That’s the reason so many people are ruined by gambling. They get behind and then they feel they have to get it back the way they lost it. It’s a deep part of the human nature. It’s very smart just to lick it, by will. And little phrases like that are very useful.”---Warren E. Buffett
“Someone builds a business over years, you know. That, they know how to do. And then they go out someplace and get into a mathematically disadvantageous game, start losing it and think they’ve got to make it back the way they lost it, but that night. A great mistake.”---Warren E. Buffett
Psychological research reveals that loss hurts at least twice as much as gain feels good.
Think King Midas and his golden touch which turns to devastating loss as touch transforms his beloved daughter to lifeless gold.
Thus the pain of loss overshadows the joy of gain.
“People do not react symmetrically to loss and gain.”---Charlie Munger
Longing and Loss in Story and Song
One of the greatest jazz recordings of all time is Bunny Berigan’s legendary rendition of Vernon Duke and Ira Gershwin’s “I Can’t Get Started.”
A lamentation upon love sought, briefly won and hopelessly lost, speaks to a profoundly painful and universal human experience.
Savor Bunny’s drunken, brilliant vocal and trumpet solo and check the heartfelt YouTube comments from his generations of fans.
What breadth of identification Bunny’s poignant masterpiece achieves!
While no one is untouched by young, yearning Judy Garland singing Harold Arlen and Yip Harburg’s anthem of hope, “Somewhere Over The Rainbow” in “The Wizard of Oz” (1939):
Compare mature Judy Garland’s heartwrenching performance of Harold Arlen and Ira Gershwin’s ballad of lost love and vanished hope, “The Man That Got Away,” from “A Star Is Born” (1954):
As Charlie’s dog teaches, moreso than yearning, it is the loss of what is nearly or briefly possessed that is most agonizing, diminishing self-esteem, promoting anger and obsession.
Conversely what is long possessed may be quietly cherished or summarily discarded and forgotten, like a child’s broken toy.
Slow Loss Flies Through The Exponential Blind Spot
“A small leak will sink a great ship.”---Ben Franklin
“The greatest shortcoming of the human race is our inability to understand the exponential function.”---Albert Allen Bartlett
People don’t react to slow-grinding loss, like the 2% inflation rate we have, until recently, long enjoyed.
At 2%, “There’s no inflation!” doesn’t sound quite like a lie, though after sixty years a dollar is barely worth a dime.
Nor is the mass public outraged by the near-usurious 24% interest rate charged by credit card companies.
Because credit card interest compounds slowly, month upon month, it is easy to ignore, though devastating to suffer.
See also, “The Great Exponential Blind Spot”.
Pathological Fear of Loss: Hoarding
Every apartment building, town or city has its share of hoarders. Their homes are filled with accumulated worthless junk they cannot discard.
No one dares enter these fire-hazard, health-hazard abodes.
What motivates hoarders is their fear of loss. They cannot part with anything, no matter how useless, broken or dirty, overwhelmed by the anticipated loss.
When hoarders are involuntarily forced to clean up and out, whether by relatives, landlords or authorities, they often feel better for it, suddenly unburdened by the weight of their formerly “prized” possessions. But they cannot anticipate that. The pain of loss is too great.
Hoarding is a type of obsession, a subtype of Obsessive-Compulsive Disorder. Like all obsessions it is a dysfunction of the serotonin system, which regulates our self-esteem. It responds well to serotonergic medication, the SSRIs.
Of course, investors are not hoarders. But investors value investments for their perceived market worth. And when quoted prices drop in market reversals, naive investors often panic, as a hoarder might at the thought of discarding an ancient pile of dog-eared magazines.
But rather than cling to their holdings and await the inevitable upturn, novice investors may frantically sell to preserve what remains in a downturn, as though running from a fire with the kids in tow.
Compulsively selling when they should be buying, for it is not a fire but a fire sale!
A rookie mistake that does not exempt bright people!
I have known two full professors who surrendered to it: one a professor of finance.
Sooner or later, when markets eventually recover, fearful sellers learn that the buyers on the other side of those trades, who kept their heads, knew better.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”---Warren E. Buffett
Training, Insight and Experience Numb Us To Market Reversals
In Charlie Munger’s 2012 BBC interview he was asked if he were troubled by a 50% decline in the market value of Berkshire Hathaway shares:
“Zero! This is the third time that Warren and I have seen our holdings in Berkshire go down---top tick to bottom tick---by 50%. I think it’s in the nature of long-term shareholding with the normal vicissitudes and worldly outcomes in markets that the long-term holder has his quoted value of his stock go down, and then by 50%. In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get, compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”---Charlie Munger
For the complete interview go to:
Genial Warren Buffett frames the concept in, perhaps, a more user-friendly way, inviting listeners to consider how indifferent they might be to random strangers’ offers for their home, their farm or their car.
For myself I couldn’t care less what I might be offered for my house, my car or my practice. I know their intrinsic value…to me.
Remaining Rational With Irrational Mr. Market
“Rationality is a really good idea. You must avoid the nonsense that is conventional in one’s own time.”---Charlie Munger
“Just because your heart is in the right place doesn’t mean you’re right.”---John Hitchcock, Linguist
“[An] increase in rationality is not just something you choose or don’t choose. It’s a moral duty to keep up as much [rationality] as you reasonably can.”---Charlie Munger
“The idea of being objective and dispassionate will never be obsolete.”---Charlie Munger
“A lot of other people are trying to be brilliant. We’re just trying to be rational.”---Charlie Munger
Benjamin Graham, Columbia University professor, writer and investor, Warren Buffett’s teacher, mentor and erstwhile employer, introduced the world to the irrational and emotional “Mr. Market,” who personifies world markets.
Every minute, every hour of the trading day Mr. Market offers to buy or sell at ever-changing prices that fluctuate with his labile mood.
For Mr. Market has a mood disorder: he is manic-depressive. When his mood is expansive his prices go to the sky. When his mood is depressed he loses faith and sells at bargain prices.
If you, as an investor, can remain rational as Mr. Market turns irrationally dour, you can gain the proverbial “margin of safety” and profit when your purchases later meet or exceed intrinsic value.
Likewise, when Mr. Market’s mood goes manic and he offers fantastic sums for rising stocks you can take profits.
But sellers need be ever mindful of tax consequences, fees, lost dividends and future gains in what Warren and Charlie have described as “a wonderful business.”
Think Berkshire Hathaway! Costco! Amazon!
“I’m no good at exits. I don’t even like looking for exits. I’m looking for holds. Think of the pleasure I’ve got from watching Costco march ahead.”---Charlie Munger
“Our favorite holding period is forever.”---Warren E Buffett
Full disclosure: writer is long BRK-B and COST and long regrets “profitably” selling AMZN long, long ago.
