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The Father/Son rule doesn’t stretch to investing

Be a referee… not a fan.
The post The Father/Son rule doesn’t stretch to investing appeared first on The Motley Fool Australia. –

The AFL has the Father/Son rule, allowing a player to play for his old man’s footy team (assuming certain criteria are met).

In my house — and given my lack of sporting ability — the Father/Son rule applies more to barracking than playing.

My 8yo is, under that rule, a fourth-generation Sydney Roosters fan.

He lives 100km from Bondi.

I grew up 50km away, and the closest I got was working in Bondi Junction for a few years.

But such is the way of things in many households, including ours.

I mean, he was free to pick his own footy team, but I might have planted some seeds with a Roosters jersey before he could speak and a Roosters footy before he could walk.

But I digress.

We were watching the game the other night.

And, as these things go, he was unhappy with the referee’s interpretation of one particular event.

“He didn’t knock it on! It went backwards” was the strangled cry.

Now, I’m as big a Chooks fan as you’ll find.

But I was also a junior league referee in my younger (and fitter days).

As a result, while I desperately want my team to win, and I desperately dislike it when I feel the rules are being applied inconsistently or incorrectly, the former referee in me can’t bring myself to completely disregard reality.

“The ball did end up going backwards” I explained, “But it went forwards out of his hands first, then bounced backwards.”

“That’s not fair!” came the reply.

The conversation that followed traversed both the rules of footy and a reminder that ‘fair’ isn’t the same as ‘I think the rules should be different’.

If you’re a parent, that’s probably familiar.

It’s also a little glimpse into our basic human nature.

Once we pick a side, we do truly start to lose perspective.

We notice the referee’s mistakes that hurt our team far more than we notice the reverse.

And while we say we want fairness, few of us actually complain when a blatant foul is missed by an official when one of our guys (or girls) is the perpetrator.

“Oh well, he was wrong, but we’ll take it” is the closest most of us get.

“We was robbed” is heard quite a lot more than “They was robbed”.

Again, it’s not surprising.

And it’s only footy, right?

But what about when it seeps into the rest of our lives?

I do tend to think we’re worse off when it comes to politics, for example, when we barrack for our team, no matter what.

When we hate it when ‘their guy’ does it, but turn a blind eye — or wilfully support it — when ‘our guy’ does, our democracy is weakened just a little more.

When we don’t think critically about an idea, because ‘our team’ came up with it. Or don’t consider the merits of ‘their idea’ before rejecting it.

The problem, of course, is that these responses aren’t even necessarily conscious choices.

Our subconscious does most of the work for us.

We know, for example, that ‘the endowment effect’ — a psychological bias — leads us to value something we have more highly than the same object if someone else had it.

(Famously, half of a group was given a coffee mug, and the other half were given money to buy the mug from those that had one. Time and time again, the group with the money would value the mug at, say, $2, while the group with the mug thought it was worth, say, $5. No matter how many times you run the experiment, the ‘endowment effect’ shows up.)

In politics — like in sport — confirmation bias tends to cloud our thinking. And, well, straight up vanilla-flavoured bias. We’ve made our choice, we want to be right, and it skews how we see and interpret the world.

I do think it’s a cancer on our politics. But that’s not my point. At least, not today.

Because I think it also impacts our investing.

I have to say, I’m still not sure if Square Inc (NYSE: SQ) isn’t paying too much to acquire Afterpay Ltd (ASX: APT), in the $39 billion deal that was announced on Monday.

But I also have to admit that, given I didn’t buy shares at $10, $20, $50 or $75, on their way to $120-plus, I might also be subconsciously trying to justify my own decision.

I don’t think I’m doing it consciously, but I can’t rule out that subconscious possibility.

I also think Afterpay’s products are bad for consumers.

Did that jaundice my view of the company as an investment?

Consciously, no. I own other companies whose products and services I think are irrational consumer choices. (I wouldn’t use them but I think people will, and I think the company will be successful.)

But subconsciously? Did my hope that consumers would make better financial choices influence my thinking on the company’s shares? Maybe, yeah. I can’t say, for sure.

Equally, while Afterpay shareholders pat themselves on the back for being ‘right’, can we be sure Square is not hugely overpaying for an overpriced asset? Nope.

But few of us, when we sell something for a stupidly high price, want to admit we were lucky. We much prefer to believe the buyer has seen the same thing we have, and is testifying to our genius.

Here’s another one to watch out for: “If I owned it, I wouldn’t sell it, but I wouldn’t buy it at this price”.

Kinda seems logical at first. Until you think about it.

If you wouldn’t pay $100 for a new pair of jeans, you should happily take someone else’s $100 if they want to buy those same jeans from you.

“I wouldn’t buy those jeans for $100, but if I already owned them, I wouldn’t sell them at this price.”

Really?

If you’ve read the whole way down, you’ll know that’s the endowment effect at play.

Now, I’m not saying you should buy, sell, buy and sell a company as its share price moves around by a few percentage points either way.

That’d be crazy.

But if you wouldn’t buy, say, Woolworths Group Ltd (ASX: WOW) shares for $35, why wouldn’t you sell them?

You obviously think $35 is too much to pay. Presumably, because you think at that price the future returns aren’t going to justify your investment.

So why not sell them, and buy something with better return potential.

It literally makes no sense (excluding tax considerations), to say something is too expensive to buy, but not expensive enough to sell.

It’s why we try to keep our ‘Hold’ recommendations to a minimum at The Motley Fool.

We ask ourselves ‘Is it likely to be market-beating or not’. It’s a yes/no question, usually with a Buy/Sell answer.

We don’t always do that, of course. Sometimes we use Hold when a company or industry is volatile, and we’re just putting the company in a ‘wait and see’ category.

Sometimes, our view is so borderline that we don’t have sufficient conviction either way.

But we try to keep those to a minimum and for as little time as possible.

Lastly, while it’s great to own shares in companies you like, and whose products and services you use, it’s important not to lose perspective.

And this one is hard.

You need enough conviction to buy and hold the shares, but you need to retain enough perspective not to be taken for a ride by management, to ignore or not see declines, and to realise when a company’s shares simply get too expensive not to sell.

The same can be true of refusing to take a loss, figuring you’ll wait until the shares come back up. Or, to think ‘Well, they’ve fallen this far… they must be good value now’.

Sometimes, that’s true. Sometimes — maybe often, if you’ve chosen well — you should stick to your guns. But always try to be as unbiased as you can, bringing enough perspective to each question that you won’t be mugged by your own subconscious.

And, perhaps most important of all, use other psychological biases that work in your favour. My favourite one is a bias to quality, meaning that if I buy well, the subsequent confirmation and endowment biases will still be there, but I will at least have the quality of the company itself to count on.

Another is being diversified.

And then there’s time. Your mistakes will, unfortunately, be a smaller and smaller part of a portfolio, meaning they can no longer hurt you as much, while your successes go on to be larger and larger parts of your portfolio (as long as you can resist selling them), meaning compounding will work in your favour.

Fool on!

The post The Father/Son rule doesn’t stretch to investing appeared first on The Motley Fool Australia.

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More reading

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The Bendigo Bank (ASX:BEN) share price is gaining. Here’s why
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO and Square. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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