There is something incredibly seductive about a charismatic CEO singing songs of growth. Even for those of us who have been let down repeatedly by an endless cast of profit peddlers, where you would think a degree of scepticism, if not cynicism, would keep us grounded, the truth is that we simply want to believe.
It is not that the leaders of listed companies are all shady grifters looking to pump and dump. While those types undoubtedly exist, they are the exception rather than the rule. Most managers are genuine in their optimism, which is often backed by real conviction in their product, a bit of recent business momentum, and plenty of blue-sky potential.
Moreover, representing the company in the best possible light, without resorting to deception, is practically their fiduciary duty.
And they always bring receipts. Armed with a carefully curated set of slides filled with impressive charts, glowing metrics, and inspirational goals, they are well positioned to support their claims.
You may think you have a penetrating question or unique insight that, when presented to the CEO, will give you a clear and unambiguous signal about what is really happening behind the scenes. In almost every case, however, that exact question has already been put to them a hundred times, and they have a well-rehearsed answer ready to go.
Even when an outcome is unambiguously negative, there is always an external factor to blame, usually one that can reasonably be argued as a temporary setback.
Though the presented narrative so often fails to eventuate, at least in the manner or timeframe suggested, it rarely erodes what we desperately wish to be true. Hope, as they say, springs eternal.
Of course, some investors are immune to these siren songs. They eye every statement with deep suspicion, viewing every stumble as proof of malfeasance. Yet this mindset carries its own set of problems. The investor who demands perfection never takes a position, or at least never holds one for long.
Extreme pessimism simply sets the bar too high. Worse still, it usually keeps you out of the market entirely, which is, as history shows, far more likely to rise over time than to fall.
So what is the remedy? How do you approach stocks with a sensible degree of realism while still leaving room for the possibility of greatness?
The first step is to arm yourself with facts, as many as you can find. Being well informed is your best defence against nonsense, so it pays to do your homework.
This extends far beyond the company in question. It is difficult to properly contextualise company details without understanding the wider industry, the underlying business model, and the broader economic environment.
Naturally curious investors have a distinct advantage here, reading far and wide simply to satisfy their desire to understand. If you are merely going through the motions and treating research as a tedious chore, the process becomes significantly harder.
Your strongest defence against unfounded enthusiasm is engaging in good faith with those who disagree with you. You want to form strong opinions, which provide the conviction needed to hold through volatile periods, but those opinions should be weakly held.
That means holding them firmly only as long as facts and reason warrant. The moment an opinion can no longer be rationally defended, it is time to shift gears. When the facts change, or your interpretation of them changes, you must change your mind. Anything less is an ego-driven delusion, which is perhaps the single most dangerous flaw an investor can have.
This is much harder to do than it sounds.
When we publicly take a stance, our knee-jerk reaction is to defend it. Nobody likes to admit to being wrong or missing a key insight. It makes you feel naive, inexperienced, or just plain embarrassed. So we dig in, far beyond what is reasonable.
Not only is that dangerous and likely to cost you money, but the fear of social embarrassment is almost always overblown. We tend to imagine that everyone else is constantly thinking about us and judging our moves. In reality, everyone is a prisoner in their own head, and their internal musings are overwhelmingly self-focused.
More to the point, what is truly more painful: the irrational fear of looking silly in front of your peers, or losing substantial capital backing a stock just to avoid admitting a mistake?
Ironically, showing humility after a poor judgement, exhibiting grace in failure, and maturely engaging with differing perspectives are the very qualities that command deep respect. (This, of course, is particularly true among discerning communities like Strawman!)
So do not feel guilty if a smooth-talking manager inspires you to dream big. There is nothing wrong with wanting to back visionary people with genuine enthusiasm. Just leave the door open for doubt, and never let your ego drown out a harsher truth.
In the stock market, stubborn pride costs far more than a bruised ego.
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