Investing is a contrarian game. The only way to win in the long run is to see things that others have missed, finding the value in places where it has been ignored. It is certainly based on sets of objective criteria, but also comes down to the human judgment of how to weigh multiple and complicated factors and is, therefore, an ultimately subjective endeavor.
New investors are taught to “buy what you know.” This was especially en vogue during Peter Lynch’s heyday in the 1990s. The advice is not strictly false but can be wildly misleading. A 1999 feature in Fortune about Barbara Streisand illustrates this.
“Where does the singer-actress-director get her financial ideas? The same places as any investor–from friends, relatives, and daily life. “We go to Starbucks every day, so I buy Starbucks stock,” she explains. (Streisand also gave some Starbucks shares to her longtime housekeeper recently as a birthday gift.) Another pick is Time Warner (the parent company of this magazine), which Streisand has held since 1992.”
“Buying what you know” is not the same thing as simply purchasing the stocks that are most relevant to your own life, as Streisand did by buying Starbucks stock simply because she went there every day. It involves dispassionately understanding what gives a particular business a competitive advantage and using your familiarity to get an edge on others in appropriately valuing the company.
Since so much of our investing decisions are subjective, one of the primary keys to success lay in understanding yourself. Which biases are you most prone to fall victim to? Where do your blind spots lie? As politics become increasingly polarized, more and more investors are finding that their blind spots lay in how they translate political beliefs into investment decisions. I became entangled in a case study of this phenomenon.
A little more than a year ago, I took a look at the firearms industry. The growth had been monumentally explosive for years. Between 2002 and 2016, the number of background checks performed by the FBI more than tripled. I wanted to know if this growth was sustainable and if not what that would mean for stocks in the sector.
Survey data has shown that the percentage of households owning guns has actually been declining for some time. That has to mean that the number of guns in gun-owning households had dramatically risen in a short period of time. By my estimate, that number had risen from about five to close to eight. That’s not an immaterial increase. At some point, this had to stop. I suggested shorting Smith & Wesson stock at the time, while it was trading at $30.59, based on this analysis.
Not everyone is ever going to agree with everything you say, but I was still surprised at the reaction from readers. The article garnered sixty-eight comments, most of them vitriolic and along the lines of pretending that trending out potential gun sales was a thinly veiled attack on the second amendment.
Here is a taste of some of them.
“As we say on the other forum, +1911. This is clearly a hit piece written by a no-nothing liberal Democrat who offers nothing of substance for investing but a simple diatribe against the 2A. As noted, his facts surrounding the history of gun control legislation, not to mention gun violence statistics, are either misconstrued or patently false narratives. Why is a purely political piece allowed here?”
“This entire article is based on a flawed understanding, and is little more than activism masquerading as investment advice.”
“Yet another politically motivated article on gun stocks. At least the author uses a Johnny Cash Quote at the beginning to let you know how he feels. Note that the use of the Dirty Harry quote tells you where he got his knowledge of guns and gun owners – from Hollywood.To put this in perspective: How would you feel about an article shorting traditional energy stocks that includes a load of questionable statistics and movie quotes saying how harmful traditional energy production is and how the good people of America are shunning it?Personally, I think firearms are the one thing that will sell very well in a time of political turmoil, regardless of who ends up in the white house. Anyone care to argue that we are not in a time of political turmoil for the next couple of years?”
“Perhaps you’re correct there has been no net amount of new gun owners, but your thesis seems weak given the number of concealed carry permit holders in the U.S. has risen from 11.1 million in 2014 to 14.5 million in July, 2016. All those new permit holders are acquiring permits without the intention of purchasing firearms? Give me a break!”
“This is where ideology can derail successful understanding of a complex situation. More women buying guns should be a clue that the narrative from the gun control advocates (often including the media, like say, Mother Jones) is based on flawed data. It’s not just women. Pink Pistols Facebook page is full of LGBTQ first time gun buyers. About halfway through the election, if Hillary hasn’t carved open a live kitten and eaten its heart on live television, go to a gun store and see who those panic buyers are lined up three deep at the counter.”
“I was expecting some serious analysis on the metrics of Ruger and S&W equities. Instead we get this disconnected flatulation that runs the gamut from a song to a movie line and an attack on the NRA and gun owners thinly veiled by an attempted to sound analytical.”
The most puzzling reactions came in response to specific data. Survey results reveal that gun ownership is declining? Well, that must mean that the people being polled have all been lying.
“And no, gun ownership is not down, that’s ridiculous- fewer people are willing to admit to a stranger on the phone that they have a gun in the house, whether because it’s a dirty little secret, it’s none of their damn business, or they believe the liberals who say they want the government to kick down gun owners’ doors and confiscate them.”
Finally, one commenter, Everett Price, suggested I read his Princeton thesis if I wanted to be better educated on gun sales.
With today’s earnings, American Outdoor Brands Corporation (the successor to Smith and Wesson) is trading at $14.16 after hours after reporting a 37% decline in revenue. This contraction was completely foreseeable a year ago.
So, why did so many people miss this and even angrily respond while curling up in denial? It is not for lack of intelligence. It is also not for lack of a knowledge about the firearms industry. It is because they allowed their political beliefs and their wish for what ought to happen to interfere with the cold, hard facts of reality. Numbers don’t lie. What cannot go on forever, will end.
I would be lying if I said that I didn’t enjoy being right. I enjoyed it very much, financially and psychologically. But, I have my own biases that I have to keep in check as well and those biases have caused me to make poor choices in the past. One such problem is confirmation bias – all investors need to make sure that they give greater heed to facts that contradict their narrative than they do to ones that confirm it, even though that makes us feel uncomfortable.
Political bias is not only something that affects conservatives either. You may enjoy shopping at Whole Foods and assume the rest of the world will too, but that did not stop the stock from being cut in half between 2014 and 2016.
In the end, if you want to be successful in investing, follow the advice of Aristotle: “Knowing yourself is the beginning of all wisdom.”
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