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Why Investors Should Keep Enemies Close


Those whose views oppose your own add depth to your perspective.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

Have you thought about your friends lately? Who do you closely associate with? It's understandable that we find connections with those who resonate with our belief structure, reiterate our passions, and enhance our strengths. Having a gym-buddy or a book-club partner who likes what you like is a good way to spend time.

So, how do our chosen associations help with our outlook toward the markets? I wanted to talk about this very important factor that seriously affects trading but ironically is often relegated to the recesses -- behind fundamental and technical analysis, entry and exit techniques, stop losses, and so forth. It's far easier to share a chart of some index or discuss a stock. So why spend any time and effort on talking about the company you keep?

Well, how about the fact that it affects your macro biases toward the market, shapes your view about the trades you make, and has more lasting influence on your portfolio than one stock or index chart?

These subtle yet powerful associations are so because human beings are vulnerable to other people's emotions. And that vulnerability is especially important if their beliefs resonate with us. This is summed up eloquently in a quote from an article called Emotional Rescue: "Although human emotions don't spread like colds, they are contagious."

If our bias is bullish, we'll keep flicking through channels until we find someone who tells us what we want to hear -- that the market is going much higher and it's advisable to put all your money in it. If we have a bearish bent, we'll scout through websites and bookmark those that enforce our already bearish beliefs, and back them with evidence we like. Even if dissenting thoughts crop up, we let them gather dust and take solace in the factual data that supports our original thesis.

Bertrand Russell said: "If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence."

The irony is that in this age of information, the thing most abundantly available is (you guessed it!) information. There are numerous blogs backing your personal thesis. No matter what we believe in, we'll find evidence to back it. And in the markets, staunchly holding on to any one thing can lead to calamity.

For this reason, I often suggest investors stroll out of their comfort zones and add a few dissenters to their trusted friends via websites that offer opposing views, keeping in mind that you don't have to swing the pendulum all the way. Even if the opposing views are aggravating to listen to and can turn out to be wrong, they often add depth to our perspective since we have to defend our original views.

Dissenters can give us the greatest gift of all: an open mind. This is the prerequisite for a flexible approach toward investing. As Thomas Dewar stated: "Minds are like parachutes. They only function when they are open."

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No positions in stocks mentioned.

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