The difficulty in being Objective

Today, I will embark on a short, succinct but very relevant post on objectivity. As investors, I had mentioned that the hardest thing to master are your emotions and this is the number one chief reason why so many people lose money in the stock market. Not only must you be able to grasp the company’s fundamentals well and analyze the financial statements; but one must also be able to control the emotional urges that get other investors into trouble, namely fear and greed. Objectivity is another aspect of the emotional equation, in which an investor’s mind tends to be clouded, subjective and biased until he can get past the “vested interest syndrome” as I call it.

Just what exactly is this weird-sounding syndrome ? To put it in layman’s terms, it simply means falling in love with the stock and company ! In all honesty, I may also be guilty of this without realizing it as many of my companies form my core long-term holdings. People tend to seek out information which affirms their beliefs and every investor would do their best to uncover information which is positive for their investments; thereby leading to the dangerous situation where potential negative developments surrounding the company’s industry or fundamentals remain “shrouded” because of selective retention. Investors tend to shun bad news about their investments because it does not conform to their expected view of how their investments should perform. Hence, this is a selective bias which, admittedly, is very difficult to detect and eliminate. It usually requires an objective non-vested third-party to provide a more objective and balanced view of a company.

This is why I strongly encourage feedback on my blog (through comments) when I write on the companies I own. My analysis may be flawed and skewed as I am vested, thus it may impair my objectivity in analyzing the situation as I may only see the rosy side and not the potentially negative side. On my own, I also visit forums to check out quality postings and others’ analysis of my companies in order to obtain a more balanced view. I actually encourage dissenting views and differing opinions which may enable me to view a company from a different perspective, and I try hard to reduce and eliminate the selective perception tendency (which filters out all negative news automatically). Thus far, I have had balanced views on Global Voice, Ezra Holdings and also Pacific Andes and have taken these views into account when I blog about the risks of such businesses. Without such views and opinions in an open forum, I doubt I would have been able to provide both sides of the story regarding a new company announcement or results release.

On the flip side though, while the importance of seeking differing opinions and viewpoints cannot be downplayed, it is also important for a value investor to maintain a certain degree of independent thinking. By this, I mean that one ought to use his own brain juice to think independently on the situation and not be overly influenced by crowd perception. As Benjamin Graham put it: “You are right not because the crowd is right; you are right because your reasoning and facts are correct”. People may have a hidden agenda, vested interest or behave too emotionally when it comes to talking about companies they either love or hate, thus take everything in stride but go through the pertinent facts in order to make your own decisions.

A parting note: Remember to view all facts objectively and impartially, as if you were a third-party observer. Although this had proved to be difficult for most investors due to the presence of emotional attachments to a company they either love or hate, it must still be attempted in order to obtain an unbiased view of one’s investment. Only then can an investor truly work towards achieving a reasonable rate of return on his investment.

Update: Thanks to little willow for pointing out that the above quote (in bold) was made by Benjamin Graham and not Warren Buffett. I have amended the post to reflect this.