NCAT: Don't fear the FOMO

Much attention has been brought to the area of behavioral economics in the past decade, and rightfully so.  To paraphrase Charlie Munger, "If economics isn't behavioral, then what the hell is it?"  Benjamin Graham had this to say long before behavioral economics was widely considered as relevant as it is today: “The investor’s chief problem — and even his worst enemy — is likely to be himself.”

Shooting one's self in one's foot while investing frequently happens when an investor's emotions override and suppress clear and logical thought.  These emotions span a broad range of fear, euphoria, greed, envy, information overload, uninformed decision making, thumbsucking, confirmation bias, and on and on.  (For the definitive guide on emotional bias in decision making see Munger's "The Psychgology of Human Misjudgement" found in Poor Charlie's Almanack.)

In adhering to Munger's advice of taking main ideas from other disciplines and applying them across other mental models, I lifted the NCAT technique from the discipline of clinical psychology.  NCAT is an acronym representing a method for handling and addressing internal conflicts, biases, and unruly emotions.  Warren Buffett's comments on his Dale Carnegie classes come to mind: “I did not take the course to prevent my knees from shaking when public speaking . . . but to do public speaking while my knees were knocking.” NCAT reminds me of just that - not crushing or suppressing feelings of anxiety or fear or sadness or uncertainty or anger or disappointment, but rather to competently move forward with the task at hand while those feelings are present.
What does NCAT stand for?


Name it: What are the emotions that I am feeling?  It is always best to stop and recognize what is happening internally.  By naming the emotion, you bring consciousness to it.  With that awareness comes more control over yourself and your actions.  Clearly outlining internal motivations is a significant aid in rational decision making.    

Claim it: Claim responsibility for those feelings.  Often times, anxiety & fear are created in one's own mind.  A particular action is only scary because that is how you feel about it.  Just because you are afraid of roller coasters or soliciting business from strangers does not mean that these are inherently scary undertakings. They are scary to you because that is the story your mind has built around the experience.  By recognizing that our own minds and stories are often responsible for irrational extrapolations of emotion, we can look at a 'scary' situation from a different angle, in a new light, with a different perspective.  

Accept it: Accept that you feel the way you do.  If it's anxiety that you feel, remind yourself that it is normal to feel anxious at times.  "Yes, I feel nervous right now."  Everyone feels it whether it shows or not.  Stop, take a deep breath and let the anxiety flow through your body and disperse.  That harder you try to suppress those feelings, the more concentrated they become, causing more internal tension.  By accepting your feelings, you can redirect the energy that it would take to fight how you feel, and channel the energy into more worthwhile endeavors. 

Tame it: After going through the previous 3 steps, you should be closer to "taming" what ails you.  Move forward and do whatever it is that you originally intended to.  By stepping into the unfamiliar, its unfamiliarity ends right then and there.  By bringing awareness, responsibility, and acceptance to the unpleasant or unfamiliar you shift your efforts towards achievement rather than defense.  

NCAT is something that I use to tone down the emotions inherent when making investment decisions.  By using NCAT and seeing a situation with logic, awareness, and consciousness, I can greatly reduce the occurrence of an emotionally charged, short-sighted reaction that I may later regret. 


Ex. 1

The Hot Seat

"This stock has tanked.  I am pretty scared at the sight of all that red on my screen.  I might have made a poor investment decision.  I should just bail."   

Ex. 2

"This stock has been a bottle-rocket and I've been sitting on my hands.  There are 15 'buy' ratings on it, and I've seen it mentioned about 50 times on a major business news channel.  I don't want to be the only one missing out.



In both examples, naming the feelings (anxiety or fear of missing out) brings consciousness and awareness to those emotions.  Are those good influencers of decision making?  No!  Claim those emotions and recognize what is happening inside.  Accept that you do feel a strong internal sense of urgency to act on those feelings, even if it is not in your best interest.  Tame those emotions by recognizing them, and realizing that the investments should be reexamined and based on fundamental merit rather than the unconscious compulsion to act swiftly and alleviate the near term pain.


Slowing down the process leads to better self examination.

Ex. 1 Revisited 
"If I sell this stock, is it because the price is way down and I can't take the pain, or has the story fundamentally changed and permanently impaired the company's future earnings power?"

Ex. 2 Revisited 
"If I'm chasing the price upwards, will I still have an adequate margin of safety - even at higher prices?  If everyone is already bullish on this stock and expectations are extremely high, what advantage do I have?"

Name It.
Claim It.
Accept It.
Tame It.

See where the Internet lives

Charlie Munger was quoted at a Berkshire shareholder meeting a couple of years back saying that he thought Google had one of the widest economic moats he had ever encountered after reading In The Plex.

This inside look at their data centers is visual support to that claim.  I also remember in the Columbia Business School Class presentations Glenn Greenberg citing Google's tremendous infrastructure and world class talent pool/attraction as competitive advantages.  All investment pontifications aside, a look under the hood at Google is quite impressive! 

Check out this Wired.com story on the data centers as well as Google's own photo gallery linked just below.

Where the Internet Lives: Google Data Center Photo Gallery

Charlie Munger Talk at Harvard-Westlake from 2010

Charlie Munger is no doubt one of the greatest minds of today.  Not only an investor, but also a philosopher who I believe can be most likened to his role model, The Autobiography of Benjamin Franklin.

Munger's lessons in both life and investing are profoundly insightful.  As Charlie often says, it is much better to learn vicariously by studying the folly and triumphs of others, then emulating the appropriate behavior.  With that being said, another Mungerism comes to mind that I often remind myself of: A lot of folks ask for advice, but very few take it. 

  

Munger Talk at Harvard-Westlake

Cook & Bynum: A young fund doing all the right things

Embedded below is a recent interview by The Manual of Ideas with Richard Cook and Dowe Bynum of the Cook & Bynum Fund (COBYX).  The young managers both have prestigious prior experience working at Goldman Sachs and Tudor Investment Corp, respectively.  After reading the interview, I would not let age belie the duo's investment insight and process.  There are several traits exhibited in the interview that piqued my interest. Listed are some of the guiding tenants of the Cook & Bynum fund:

1. Astute subscribers to Munger's theory of Metal Models and building a mental latticework on which to hang one's ideas.
2. Buffett & Munger's belief in portfolio concentration - concentrating one's assets in one's best ideas.
3. Buffett & Munger's adherence to only working with the highest quality management with properly aligned incentives.   
4. Prefer to buy a great business at a fair price rather than a fair business at a great price.
5. Eating their own cooking.  The majority of their net worth is personally invested in the fund.
6. Ben Graham's landmark principle of investing with a Margin of Safety.

The interview below goes into more detail about their background, philosophy, and process.   I was a bit disappointed to see a 1.88% expense ratio, but hopefully that will go down as assets under management grow.  If Cook & Bynum stick to their guns as outlined in the interview, I would expected a very enviable long term track record. 


Manual of Ideas Interview With Cook Bynum With Disclaimers


Disclosure: this is not a recommendation to buy or sell any securities mentioned in this article or anywhere on this website.