Putting a Gap Between You and Stupid

New York Times columnist Carl Richards has a great saying. A financial advisor, Richards says, is someone who puts a gap between you and stupid. The smartest investors in the world are tempted to do dumb things with your money. An advisor's job is to look you in the eye, shake their head, and walk you back from the ledge. 

Every investor needs someone like this. But how many of us have one? Few. Most of us have the opposite. We seek out people who agree with our ideas, cheering us on and holding our hands straight off the stupid cliff.

Keep that in mind, and meet David Rosenberg.

Rosenberg is an economist with Gluskin Sheff in Canada. He's on TV a lot, is usually pessimistic, and has somewhat of a cult following among bears. A lot of his calls were wrong in hindsight, given the five-year bull market. That's nothing against Rosenberg. He seems like a smart guy. Forecasting is just hard.

Now Rosenberg is changing his tune. He's turning more bullish on stocks and the economy.

Some of Rosenberg's clients are furious. Why? Not because his timing was off, but because he changed his mind at all.

"Cancel my account, and tell Dave I don't recognize his work," one client wrote, according to The Wall Street Journal. "He used to be the straightest shooter out there ... it is too much for me to have another cheerleader," wrote another.

These clients weren't paying Rosenberg to analyze the economy and provide an objective forecast. They were paying him to confirm their pessimism. Now that he's bullish, they want nothing to do with him.

"I'm finding out that a lot of my loyal readers were never really interested in my analysis," Rosenberg said last week. Next stop, Stupidville!

There's a name for this: confirmation bias. It's the tendency to seek out and glorify information that supports our existing beliefs, and ignore and discredit information that goes against them.

It's incredibly powerful. During the 2004 presidential election, psychologist Drew Westen of Emory University and his colleagues studied the brains of 15 "committed" Democrats and 15 "committed" Republicans with an MRI scanner. Each group was shown a collection of contradictory statements made by George W. Bush and John Kerry. Not surprisingly, the partisans were quick to call out contradictions made by the opposing party, and made up all kinds of justifications to rationalize quotes made by their own side's candidate. 

But here's what's scary: The participants weren't just being stubborn. Westen found that areas of their brains that control reasoning and logic virtually shut down when confronted with a conflicting view of their preferred candidate. He explained in the book The Political Brain:

When confronted with potentially troubling political information, a network of neurons becomes active that produces distress. ... The brain registers the conflict between the data and desire and begins to search for ways to turn off the spigot of unpleasant emotion. We know that the brain largely succeeded in this effort, as partisans mostly denied that they had perceived any conflict between their candidate's words and deeds ...

Once partisans had found a way to reason to false conclusions, not only did neural circuits involved in negative emotions turn off, but circuits involved in positive emotions turned on. The partisan brain didn't seem satisfied in just feeling better. It worked overtime to feel good, activating reward circuits that give partisans a jolt of positive reinforcement for their biased reasoning.

The bias that cause people to write off an opposing politician while defending their own is the same one causing David Rosenberg's clients to flee. In each case, people aren't looking for someone who can reason and think rationally. They just want someone to confirm whatever they already believe. In a constantly changing world, this is one of the surest routes to deception and bad decisions. 

CEOs do this, too. In one fascinating study, a group of researchers from Cornell showed that CEOs who surround themselves with colleagues who shell out praise and flattery are more confident in their decisions, less likely to peruse strategic change, and ultimately more likely to be fired. Former Lehman Brothers CEO Richard Fuld "surrounded himself with every type of yes-man and woman you could possibly get" says author Lawrence McDonald. No one challenged his views, at least while remaining employed. The result was a colossal blindness toward risk.

So, what can we do about it?

Follow Carl Richards' advice. Find someone who puts a gap between you and stupid.

I think one of the best things anyone can do in investing is find someone who disagrees with your views. If you're a bear, find a bull. If you like bonds, find someone who doesn't. Seek them out and make them your best friend. Spend more time with them than the people who agree with you. Listen to them carefully. Take what they say seriously.

This is devilishly hard. But when you force yourself to do it, you will be shocked at how much more you learn from people who disagree with you than those who share your views. It forces you to accept that things are usually more complicated than your gut reaction makes them out to be.

I used to be in the hyperinflation, dollar-is-going-to-crash camp until I forced myself to read the other side of the argument and realized it made more sense. Assured the financial crisis would doom the economy, I was once tempted to sell most of my stocks in late 2008 until a friend walked me through the history of the Great Depression, noting that stocks did spectacularly well for those who stuck it out. In both cases it was hard to listen to the views of someone I fervently disagreed with. But in both cases, the other side was right. I'm so glad they put a gap between me and stupid.

Try it yourself.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (27) | Recommend This Article (87)

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 October 25, 2013, at 2:26 PM, Raphael1990 wrote:

    Another nice example of people looking desperately for confirmation are the shitstorms in the comments of negative articles about certain companies.

  • Report this Comment On October 25, 2013, at 4:11 PM, Mega wrote:

    "I think one of the best things anyone can do in investing is find someone who disagrees with your views."

    Buffett and Munger are a subtle example of this. The Chairman is a Democrat and the Vice Chairman a Republican. Buffett sometimes calls up Munger to bounce new investments off him and Munger almost always says, "No, that sounds like a bad idea."

  • Report this Comment On October 25, 2013, at 4:21 PM, Mega wrote:

    It can also be an internal dialogue. Sometimes I see a company where the numbers are clearly attractive, but there is a qualitatitve or even intuitive factor holding me back. When I have competing mental narratives I follow the more conservative one, trying to obey Buffett's first rule ("Don't lose money").

  • Report this Comment On October 25, 2013, at 4:26 PM, shoemaker17 wrote:

    Good article. Reminds me of how Bruce Berkowitz of the fairholme fund pays outsiders to pick apart their best ideas...

  • Report this Comment On October 25, 2013, at 7:07 PM, Mega wrote:

    "Some of Rosenberg's clients are furious. Why? Not because his timing was off, but because he changed his mind at all."

    Maybe also because he was unable to supply the service he promised - useful macro forecasting. He was unable to when he was a bear, and most likely he will be unable to as a bull.

    The clients who left probably made the right move, although for the wrong reason.

  • Report this Comment On October 25, 2013, at 7:30 PM, Mega wrote:

    Berkowitz claims that he tries to kill his investment ideas but I am suspicious. He seems like he has a front-loaded investment process. Once he gets his teeth into an investment idea he doesn't give up, like a pitbull.

  • Report this Comment On October 25, 2013, at 8:57 PM, dbtheonly wrote:

    Er, MS,

    Warren Buffett is a Republican.

    Mr. Housel,

    "the hyperinflation, dollar-is-going-to-crash camp" has been around since the early 1980s to my knowledge. Goes along with "Gold Standard" and "Fiat Currency".

    Maybe they'll get it right one of these days. But I wonder how they get anyone to shell out (soon to be worthless?) paper dollars for their newsletters.

  • Report this Comment On October 25, 2013, at 9:15 PM, TiaCyn wrote:

    Morgan, thank you for being my gap!

  • Report this Comment On October 25, 2013, at 9:25 PM, TMFJCar wrote:

    Morgan,

    Another great article. While I'm certainly not the smartest man in the world, I've done well by attempting to eliminate bias and change my mind when facts change. Thanks for sharing this with our readers.

    Jamal C.

  • Report this Comment On October 26, 2013, at 11:31 AM, daveandrae wrote:

    When it comes to investing, the gap between me and my stupidity has always been simplicity. At the end of the day, my portfolio is either a better investment than cash, or it is not.

    Everything else is commentary.

  • Report this Comment On October 26, 2013, at 4:33 PM, kbeck02 wrote:

    1. People get locked into the way they think, without looking at the "other side" because they have never been taught (yes, taught) critical thinking. This leads to all kinds of bad assumptions and decisions.

    2. Try to find a "financial advisor" who will talk to you if you do NOT have $500,000 to invest.

  • Report this Comment On October 26, 2013, at 5:30 PM, cmalek wrote:

    "A financial advisor, Richards says, is someone who puts a gap between you and stupid."

    In theory. In practice, the financial adviser has his own biases or agendas and tries to convince you to be reasonavle and do it his way. He believes that the letters after his name give him the right to browbeat you to accept his opinion. Who is to say which one is stupid, the adviser for being arrogant and not listening to you, or you for letting him browbeat you. Besides, I do not need help to lose money, and I certainly do not want to have to pay for help in losing money.

    Also, as kbeck02 wrote, "Try to find a "financial advisor" who will talk to you if you do NOT have $500,000 to invest."

    "Now Rosenberg is changing his tune. He's turning more bullish on stocks and the economy."

    Time to sell, the market is going to tank.

    "Some of Rosenberg's clients are furious. Why? Not because his timing was off, but because he changed his mind at all."

    He was mostly wrong as a bear. Is he going to be any more right as a bull?

  • Report this Comment On October 26, 2013, at 6:04 PM, cmalek wrote:

    @kbeck02:

    I was under the impression that everyone on the MF site had at least $500,000 to invest. /grin/

  • Report this Comment On October 26, 2013, at 6:12 PM, prginww wrote:

    As a newbie, What qualities should a person look for in a financial advisor?

  • Report this Comment On October 26, 2013, at 11:05 PM, prginww wrote:

    I've only had one experience with a financial advisor, but that was, he was someone who got paid whether or not he made money, and had a smug, self-righteous air about him.

  • Report this Comment On October 27, 2013, at 5:35 AM, georgetag wrote:

    From my perspective it appears all that anyone has to do is understand the basics of TMF investment lessons. And maybe watch Suze Orman on CNBC or I-Tunes. TMF teaches to invest in only what you know and Suze teaches to live within your means. No one really needs a financial adviser. All that other crap is...just that crap.

  • Report this Comment On October 27, 2013, at 11:33 AM, daveandrae wrote:

    After his portfolio declined by approximately 35%, my son's Grandfather sold out completely around 770 on the s&p 500 in 2009

    He hasn't gotten back into the market since.

    After the U.S. lost its AAA credit rating I knew another guy that thought the market was going to tank around 1260 on the s&p 500 a few years back, sold out completely and has been sitting in cash ever since.

    These are the type of people, and make no mistake, there are truckloads of them, that would benefit tremendously by paying a financial advisor, say, 2% a year. For the primary job of the financial advisor is keeping you, the investor, from making the BIG MISTAKE which always starts with..... "this time is different"

    Those of us with a correct long term view know that "this time" is never different. The players may change, but the game itself has always remained the same. Which is simply....

    Buy low, & HOLD!

    The first part is easy. The second part is tremendously difficult for most people.

  • Report this Comment On October 27, 2013, at 11:38 PM, oldman144 wrote:

    Too late. Stupid is as stupid does.

  • Report this Comment On October 28, 2013, at 9:04 AM, ScoopHoop wrote:

    Great Article. I like the idea of bouncing ideas off someone with a different point of view, however, they must have an educated point of view. I've met people who don't like bonds, but they didn't understand them either. I probably trust my father-in-law more than anyone else because he really understands the markets, although I don't always agree with him. During the market crash of 2008-09 I met every week with the same two bright minds at a local bar. I bought stocks every week for about six or seven months during the market crash. All those stocks are up 50% to 100%. No one is an island. I suspect investors usually perform better in teams of people with different points of view.

  • Report this Comment On October 28, 2013, at 12:55 PM, knutson1942 wrote:

    How does one know the person you agree with or disagree with is right or wrong ?

  • Report this Comment On October 28, 2013, at 1:10 PM, bethie30 wrote:

    As a fee-only financial planner, I love this article! As an investor, I also love this article. In my life, I try to look at all the view points in order to make the best decision. This frequently involves looking at opposing view points. In doing this, it may not change my opinion, but helps to reinforce my decision. It is similar to what Buffet says (be fearful when others are greedy) and what the Motley Fool tries to teach about researching investments.

    As a financial planner, I try to make sure my clients stay on a prudent course. I try to show them that bailing from the markets in a downturn or that investing in your brother-in-law's, cousin's, friend's crazy venture with all their money may not be wise decisions.

    As for finding financial planners without minimums, it makes me sad that more planners and advisors are not addressing this market. I do not have minimums. Try looking at the Alliance of Cambridge Advisors (acaplanners.org), the CFP website (cfp.net) and the National Association of Personal Financial Advisors (NAPFA.org).

  • Report this Comment On October 28, 2013, at 1:15 PM, Schneidku40 wrote:

    That's an interesting point about part of a financial advisor's job is to protect you from yourself and your emotions. I hadn't thought of that before.

    So it seems to be a double edged sword when they're advising you not to sell when the market crashes. Sure they want to keep your business and your commissions, but they also want to keep you from (most likely) making a mistake.

    Thanks for pointing that out! I've never used an advisor and never will, but I've thought about going down the path to become one myself several times but have always talked myself out of it because of all the negative connotations out there that are connected to it.

  • Report this Comment On October 28, 2013, at 7:12 PM, KBOKSOFT wrote:

    Anyone using a "Financial Advisor", try this: Ask him/her to provide his/her own personal (real) 10-year rate of return on his/her own personal investment portfolio.

    Are they beating the market? Are they beating any of the Motley Fool portfolio returns?

    Are they beating your returns?

    How about after adjusting for the adviser's fees?

    ...If this person is going to put distance between me and stupid financial decisions, shouldn't they be MEASURABLY better than me at making financial decisions?

    (One other thing: paying for financial advice from a Financial Adviser who is too embarrassed about his/her own returns to divulge them is like paying for legal advice from a lawyer calling collect from prison.)

  • Report this Comment On October 29, 2013, at 7:40 AM, sagitarius84 wrote:

    That is a very interesting article. I guess it boils down to two questions:

    1) Do you want to be right?

    or

    2) Do you want to make money?

    I would take making money any day. But for most people, they would prefer to be right, even if they have no idea what they are talking about

  • Report this Comment On October 30, 2013, at 12:23 AM, SkepikI wrote:

    ^ Well, they are all right sometime, even the permabears. The trouble is you need to be right AHEAD of time, which is much harder.

    Off the top of my head I cant correctly attribute this quote, but Life can only be lived in the forward direction, but it can only be understood in reverse....

  • Report this Comment On November 01, 2013, at 2:44 PM, drborst wrote:

    Morgan,

    I didn't finish this one. Me reading your articles is surely a case of confirmation bias (but I'll probably check again next week).

  • Report this Comment On November 05, 2013, at 10:54 AM, PaulSem wrote:

    prginww "As a newbie, What qualities should a person look for in a financial advisor?"

    A prince who will not undergo the difficulty of understanding must undergo the danger of trusting. Marquess of Halifax

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2700115, ~/Articles/ArticleHandler.aspx, 8/29/2014 6:12:31 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement