A Polarizing Company That Often Poisons Rational Investing Brains

Sometimes when we take a position on a controversial topic, we poison our own thinking. Nowhere is this more apparent than in politics.

Back in 2009, while interviewing Arianna Huffington on CNBC, host Larry Kudlow stated, "I have not changed my point of view for my entire adult life." As our own Morgan Housel later lamented

I struggle to think of a worse trait for someone hoping to understand the world. The guy you want to listen to is the one who is constantly saying: "I was wrong. Here's why, and here's how it's changing my outlook." 

There's a name for such a hardheaded phenomenon: the backfiring effect. The idea behind the effect is that when you are presented with factual information that runs contrary to your beliefs, instead of integrating this new knowledge, you actually double down on your previous point of view.

But taking such all-or-nothing stances on important issues isn't limited to politics; when this type of thinking enters our investment mind-set, it can wreak havoc on our portfolios.

Recently, I've been taking a long look at several biases that can poison our investment brains. Below, I'll give you a real-life example of the backfiring effect in action, let you know how you can combat it, and at the end, offer up access to a special premium report.

Is there a more polarizing stock out there?
Back when I used to work at Fool headquarters outside of Washington, D.C., there was a running joke that if you ever wanted to get lots of passionate commenters for one of your articles, all you had to do was write a piece about Sirius XM Radio (NASDAQ: SIRI  ) .

Want proof? Check out this article, published in January 2009, when Sirius was trading for as low as $0.11 per share. In it, Rick Munarriz makes the argument that analysts shouldn't be discontinuing their coverage of Sirius based on its then-impending debt payments and the speculative nature of the stock.

Rick argued that "one less celebrated analyst tracking the company will leave the ultimate lessons in this hit-or-miss case study unheard and unheeded." In other words, analysts who were dropping the company were missing the chance to glean some important lessons for future investors.

But a look at the comments on the piece reveals some passionate thinking that in no way addresses Rick's argument, and that actually had nothing to do with Sirius at all.

One commenter wrote: "Why would anyone buy a subscription to a rag that spends it's time trying to bury an 11 cent stock that you FOOLS pumped?" Meanwhile, another bemoaned the fact that Rick didn't own any shares of Sirius. 

The funny thing here is that Rick wasn't really presenting any negative facts about Sirius, but the title made it appear as though he was, and that was enough to make these investors irate, and to double-down their allegiance to Sirius.

There were, thankfully, several examples of cool-headed, well-reasoned responses to Rick's main points. For instance, one commenter, clearly understanding Rick's gist, wrote: "I would think the drama at Sirius would make it more interesting to report about and watch." 

What you can do
Of course, I have no way of knowing if any readers actually went out and doubled down on their holdings. The bottom line is that there was a lot of passion, and oftentimes, there's not enough cool-headed reasoning.

One of the toughest things to do as an investor, and as a human being, is to dissociate ourselves from our performance. If I tie all of my self-worth to how I perform as an investor (or as an athlete, cook, or any other pursuit I undertake), then I make it very difficult to honestly assess how I'm doing.

Though I'm far from immune to the backfiring effect, I've found that there are two practices that help me be more honest about my performance.

First -- before doing anything else -- I admit that there's more that I don't know about the world than I do know. By admitting that, I'm accepting the fact that I'm human, and prone to make mistakes.

Second, when I do make mistakes, I need to take the time to acknowledge them -- publicly -- and investigate them for lessons that can be learned.

But what about Sirius?
Not a lot has changed since 2009. Stories about Sirius still attract a lot of attention, and can get a lot of people's blood boiling.

Despite Sirius XM being one of the market's biggest winners since bottoming out three years ago, there is still some healthy upside to be had if things go right for it -- and plenty of room for it to fall if things don't. Read all about Sirius in our brand-new premium report. To get started, just click here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2013, at 8:32 PM, DR1P wrote:

    Brian,

    So, exactly what is your point? Are you talking trying to talk about “polarizing companies” in general, or just Sirius XM which is the only one you mentioned? Your titling the article "A Polarizing Company That Often Poisons Rational Investing Brains", and then only mentioning Sirius (and specifically referring to the comments from one specific article) would lead one to infer that you are trying to imply that Sirius XM is the polarizing company (which I would agree with you what it has been fairly polarizing) and that the people who invest in it have had their rational investing brains poisoned by it (which I would disagree with you on). I wouldn't want to assume since, according to your example, apparently just because you say something that can be interpreted one way doesn't mean that it is intended that way.

    OK, maybe the commenters on the article you gave as an example didn't read the article in its entirety. I will have to disagree, however, with your statement “Rick wasn't really presenting any negative facts about Sirius” and no, it wasn't just the title that made him look like he was against Sirius XM. Maybe they got to the point where Rick stated "He's right..." and assumed that Rick agreed with the analyst... since Rick stated that he did... and stopped reading. Typically the phrase "he's right" IS considered an affirmation of what someone else has previously stated. If you only read the article to that point, it is, without a doubt, an anti-Sirius XM article. Sometimes people just don’t want to continue reading something when they know (from what they have read so far) it is something that they just do not want to read. Yes, the tone of the article changed, but there could be a very good argument that he lost them at that point.

    It wasn't the investing part of the brain that caused those responses, it was the part that was tired of hearing, or more correctly reading, various comments about how the investor had “obviously” made such a stupid mistake by investing in Sirius XM. Each investor looks over whatever he or she looks over to make a decision and decides on what to invest in. Some look at the charts, some look at certain parts of a company's specs, some blindly invest in whatever some website or talking head on TV recommends, some invest in whatever they see a lot of people buying and others have whatever method they prefer… some good and some not so good. Have you stopped to consider (and maybe you have) that the people who's "rational investing brains were poisoned" weren't the people who invested in Sirius XM, but the people who concluded that it would fail?

    Yes, there have been a lot of vitriolic comments in response to some of the articles, but it has been somewhat a two way street. The main articles I remember were ones on Seeking Alpha by Rocco Pendola. (His always reminded me of the Toby Keith song "The Critic", as do a lot of Sirius XM articles.) He would write an article about Sirius XM because, as you pointed out, you were assured to get commenters. The thing about a lot of his articles was that if you criticized his article on its merits (or lack thereof) he would commonly criticize your comment on spelling, grammar, composition and commonly with some derogatory comment about emotional Sirius XM investors, instead of on the content. I saw at least one comment from him that at some points you couldn't even understand what he was trying to say… in addition to the spelling errors. It appeared that he just got so emotional that he forgot to run it through his editor first.

    Then there are Rick’s comments (which definitely weren’t positive towards Sirius XM) of: "In other words, Sirius has become a crapshoot. It's a lottery ticket, hinging almost entirely on CEO Mel Karmazin's ability to refinance the company's debt before the nearly $1 billion that is due this year forces the company into bankruptcy reorganization." Is (or was) Sirius XM a crapshoot? There is a valid argument that the whole stock market is a crapshoot. You must remember that 50% of the orders made are a financially bad decision. Since for every trade someone is buying and someone is selling, it depends on where the stock goes afterwards as to which one was a bad trade. As I mentioned, everyone has their method of determining what to invest in. Most of the people who decided to invest in Sirius XM have, so far, come out pretty well... especially Liberty Media. I’ve come out pretty good so far myself.

    As for the quote of: “I struggle to think of a worse trait for someone hoping to understand the world. The guy you want to listen to is the one who is constantly saying: ‘I was wrong. Here's why, and here's how it's changing my outlook.’” I would have to disagree with that. You might learn a lot from his mistakes, but I definitely wouldn’t want to follow him. If he’s “constantly saying ‘I was wrong”, is the way he changes his outlook a good thing? Maybe, but it might be another opportunity for him to say ‘I was wrong. Here's why, and here's how it's changing my outlook.’ I would prefer to listen to the guy who occasionally says “I was wrong”. Someone who, when he IS wrong, will admit to it… but doesn’t have to “constantly” say he was wrong. Someone who is “constantly” saying “I was wrong” obviously isn’t very good at making initial decisions, and possibly decisions on how to change. But at least he will admit to it.

  • Report this Comment On February 03, 2013, at 5:50 PM, Corsair3117 wrote:

    Brian,

    Someone's viewpoint on economics and political philosophy should not be confused with their take on individual stocks and the micro and macro developments that can make turn a one-time "dog" into a winner and visa versa. Or else an awful lot of people, with consistent viewpoints, would never add or sell issues from their stockportfolios!

    I mention this obvious point for one reason. Your general advise on trading is quite worthwhile. It's when you get into gratitous political asides that you falter...badly. Although some great men, like Ronald Reagan, changed viewpoints and political philosophy from their earlier years, any number of admirable people have a formed a rational and complex viewpoint of the world by early adulthood. I'm not talking specific issues, but an overall intellectual VIEWPOINT, buttressed by their premises

    That Morgan Housel "laments" a Larry Kudlow statement is hardly surprising. I'm sure a free-market man like Kudlow says a lot that Housel laments. I watched a 60 Minute piece on liberal Supeme Court justice Elena Kagan when she had been nominated. Her upbringing on NYC's "people's republic" of the upper west side featured stimulating intellectual dining table discussions but the viewpoint? An indoctrination of a unified very left/liberal viewpoint. Through her college years and legal career..no change. Since on the country;s highest bench...no breaking of the ranks on decisions (Intriguingly, Clarence Thomas' libertarian side has seen more diversion from the conservative wing-on flag burning and other decisions than any Obama or Clinton appointee). Fair enough. Obama won and has the right to name his nominees without them being "Borked" . Kagan's consistency is hardly a fault in my judgement, however little I agree with her thoughts. I merely pick her out as someone 180 degrees opposite the consistent Larry K-yet just as dedicated to a long, long held viewpoint

    It's now Super Bowl Sunday -a great day for a wager- and I'll make one giving 10-1 odds that Housel hardly think Kagan's since-childhood consistency is at all "lamentable". Not with Morgan's verbal gymnastics to find defend Obama's regulations and dismal economic stewardship, using Soros and very liberal columnists (all with "lamentably" constant viewpoint) as support. With Housel, depressingly, it's simply a case of whose ox is being gored.

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