Identify investment opportunities

The Last Drink. The End of An Idea.

Spring is just coming and I have already destroyed a beloved idea, namely, that alcohol is a positive part of our culture and even supports health when consumed moderately. A glass of wine or beer a day is good for the heart, for the circulatory system and helps against depression. That is what we learned in Austria.  Unfortunately, current studies speak against this (see links at the end of the newsletter.*).

"Any year that you don't destroy one of your best-loved ideas is probably a wasted year," says Charlie Munger (born 1924), longtime business partner of Warren Buffett and Vice Chairman of the successful U.S. company Berkshire Hathaway. Why? Because those who cling to convictions for too long close their minds to new insights. Nothing is more dangerous for investors as this statement. 

The thought of Charlie Munger is extremely powerful. Although the quote has been with me for a long time, I have only recently realized the power behind it. Hooray, my year 2023 is saved because I have changed my perspective.

Critical distance to our own theses

A thesis is not carved in stone. Rather, it must repeatedly be measured against  reality. Those who invest are subject to cognitive biases. The field of behavioral finance theory is concerned with this phenomenon. It is now scientifically proven that we are emotional beings (hear, hear!) and do not just agents of perfect rationality. Those who cannot drop formed opinions anchor them permanently (anchoring). In addition, we only select information that confirms our own expectations (confirmation bias).

Anyone who invests a lot of time and energy in analyzing securities is particularly at risk. The deep involvement with the business model sometimes reduces the critical distance and turns the analyst into a true fan. Too little do we realize that fan is short for fanatic. This is exactly the opposite attitude of the idea-destroyer. The fanatic holds on to ideas and ideologies unconditionally. These gum up his brain and are not a good way to recognize the next investment opportunity. 

So please do not scold us analysts when we change our minds. Rather, encourage us to do so more often. 

* Information on recent studies on alcohol consumption:

The Lancet
New York Times
World Health Organization