🔒 Every Buffett needs a Munger – With insights from The Wall Street Journal

Jason Zweig, who pens a column called The Intelligent Investor for our partners at The Wall Street Journal, unpacks some home truths in this excellent contribution. I like his conclusion: successful decision-making in any walk of life should first pass a “yes, but…” counter argument from an honest friend. Doubly so with investing. – Alec Hogg

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Every Warren Buffett needs a Charlie Munger

Online trading buddies can lift you up when you’re feeling down. But real-world friends tell you when you’re wrong.

Jan. 22, 2021 1:52 pm ET

As anyone who’s ever raised—or been—a teenager knows, happy outcomes are rare when groups of people egg each other on in a risky activity.

Just look at financial markets now. An activity that people have historically pursued in isolation—buying and selling stocks and other assets—has become the hottest way to socialize.

Friends get together on Zoom to “live-trade” stocks just as they watch movies or TV together on Netflix or Amazon Prime. Trading websites’ leaderboards show the names and gains of the people making the most money. Brokerage apps display lists of the stocks their users are flocking to the most. At some online brokers, you can even “autocopy” other users, mechanically duplicating their trades.

All this has gotten millions of novices over the fear of managing their own money and shown that investing doesn’t have to be deadly dull. It has given people something to talk about other than politics and the pandemic.

Unfortunately, when investing turns into socializing, it also turns dangerous.

Don’t get me wrong. Even the best investors benefit from a sidekick and sounding board to listen to and learn from. Warren Buffett has Charlie Munger. Mr. Buffett’s great teacher, Benjamin Graham, had Jerome Newman.

But there’s a critical difference between a real-life friend and people you’ve never met whom you follow online. Yes, online trading buddies can lift you up when you’re feeling down and make you feel you belong. But real-world friends tell you when you’re wrong.

Mr. Buffett likes to call Mr. Munger “the abominable no-man” for his tendency to shoot down suggestions. Mr. Buffett has told me he treasures their friendship not just because Mr. Munger gives him good ideas, but because he destroys bad ones.

That’s the problem with “social investing.” Joining an unlimited group of people you know little about, who may all share an itch to get rich quick, can lead to imitation rather than education. It can become an “amen corner” without walls, an almost infinite echo chamber.

Markets work best when they aggregate the opinions of people who disagree about risk and return and valuation. The wisdom of the crowd can be remarkably accurate when it collects huge numbers of differing viewpoints. But when everyone thinks alike or relies on the same set of information, the result is what Michael Mauboussin, a strategist affiliated with Morgan Stanley Investment Management, calls a diversity breakdown.

That can become especially dangerous in a roaring bull market, when so many assets go up in price so fast. How can you admit you don’t know what you’re doing when you’ve made so much money doing it? Why seek dissenting opinions when everything you touch turns to gold?

The more the winners make in a bull market, the more they tend to brag. The more they brag, the more attention and imitators they attract.

And the less newcomers know about investing, the more likely they are to follow the biggest and loudest winners.

That, in turn, helps drive up the winners’ favorite assets, attracting still more attention and cranking prices up further in a self-fulfilling prophecy.

As long as markets go up, that’s a profitable strategy.

Markets don’t always go up, however—and then the self-fulfilling prophecy will turn into a doom loop of loss and panic.

Across centuries of financial history, whatever was “obvious” that “everyone” had to own has tended to fall the most when markets turned: financial stocks in 2008-09, internet stocks in 2000-02, the “Nifty Fifty” growth stocks in 1973-74, Radio Corp. of America in 1929-32, and so on all the way back to the collapse of the South Sea Co. in London in 1720.

In short, consensus and popularity are rocket fuel on the way up and poison on the way down.

That’s why it saddened me when I learned that the American Association of Individual Investors, a Chicago-based nonprofit with 154,000 members and 34 local chapters across the U.S., notified its chapters late last month that it would close them down as of Feb. 28.

Appeared in the January 23, 2021, print edition as ‘Even Warren Buffett Needs ‘the Abominable No-Man’.’