The Price of Cockiness

As explained in this space last week, we sold our entire position of 590 shares of Human Genome Sciences (Nasdaq: HGSI) on 9/11 at $13.35, and reinvested the proceeds in 700 more shares of a current holding, Millennium Pharmaceuticals (Nasdaq: MLNM), at $11.65.

Do you really have an open mind about investments, or do you filter out the contrary and hear only the supportive? If the latter, you are only human, but you can profit from the former. It's really difficult. More difficult than polar bear swims in Minnesota and saying no to your children.

We like to be on teams; we like to be cheerleaders. Even iconoclasts and loners form clubs with others like them. Take our discussion boards. They're filled with lively chatter, and after a time, we get to know something about regular visitors. The more we feel a part of the team, the more we like to root for the team. We become cheerleaders. Same goes for our investments.

And why not? When we do our research and determine to buy an individual stock, we wish the best for management and products. We want the company to create value, and that value to translate into stock price gains over time. Why not enjoy the company of others who want the same? That's why we form investment clubs, online and off.

The die song
We also enjoy rooting our stocks down -- when we short its shares because of a weakening business. Bill Mann (TMF Otter) and I like to check our portfolios on occasion and sing a ditty about our short holdings, "Die, [insert company name here], die--aye! Die, [company], die-aye!" It's black comedy, and we laugh at ourselves. We certainly don't wish anyone harm, but we do hope our investment thesis proves correct and the market rewards us. Yet I definitely felt shame when Selena Maranjian (TMF Selena) leaned over and said one day, gently (for she never wags a finger), "You know, people work for that company."

So while being on a team makes us feel connected to a community -- like valued participants in a worthwhile endeavor -- it must not lead us to see those who disagree with us as The Enemy, not worthy of credit or interest. We must not be blind to the possibility that we are wrong or that our views need to be strengthened. 

Learn from opponents
Here's a recent personal example. I reviewed forecaster Robert Prechter's Conquer the Crash last week. I happen to think no one can predict market directions (wouldn't they be too rich to slave away on books?), and I previously dismissed him -- without reading one word he wrote.

But when I actually read his book, I found -- whether or not you agree that a deflationary depression is on the way -- he presents some interesting and useful information. For instance, he offers a great brief explanation of how the Federal Reserve banking system actually works, as well as historical data on many aspects of stock market and credit activity. It made me realize how much more I have to learn. If I had never cracked the cover because of my prejudices, I would have been worse off.

Yet I took some good-natured guff in the office and via email for giving this guy air time. (Some of the non-Prechter guff was deserved. I short-circuited and called Intel (Nasdaq: INTC) a non-manufacturing company. Mayday!)   

Labels and lapels
Worse, the next day I read an online column by financial writer Arne Alsin, who dismisses Prechter on the basis of his alleged Dow 400 prediction (Prechter actually predicts 700 in his book, but so what), and then refutes PIMCO Bond fund manager Bill Gross's well-publicized, bearish Dow 5000 prediction. Alsin writes: "Doomsday scenarios abound in the midst of bear markets. There's no shortage of doom-and-gloomers today, ranging from the absurd, like Robert Prechter's call for Dow 400, to the reasoned and respectable, such as bond fund manager Bill Gross' case for Dow 5000."

The very point of Gross' that Alsin attacks (the market's current low dividend yield) is also one of Prechter's major points. (Did Alsin actually read Prechter's book?) Alsin furthermore praises two of Gross' points (stock options dilution and funny accounting business) that are consistent with Prechter's arguments. But because Prechter predicted Dow 400 ("Absurd!"), Alsin apparently assumes the rest of his commentary is useless. Alsin's -- and his readers' -- loss.

This is the financial equivalent of giving the heave-ho to people of opposing political parties solely on the basis of their affiliation, or filtering out people in social situations on the basis of dress -- screening out by labels and lapels. Of course, a certain amount of categorization is necessary for survival. You have only so much time, and many contacts are superficial. If we didn't have social filters, we would give ourselves up to every distraction and accomplish nothing.

I've done it, too
I'm certainly not holier than holy, and I admit to certain dismissals to up the rhetorical volume. Last week, colleague Matt Richey (TMF Matt) sent me the Bill Gross column Alsin attacked, but I didn't read it before snapping back a smart-alecky remark: "How can we credit a bond fund guy for bearish opinions? That's sure some conflict of interest!" See how easy it is?

I've done it with investing, too. Rambus (Nasdaq: RMBS) licenses computer memory technology and earns a percentage royalty on products sold containing that technology. Simple. Well, if the prices of those products decline, and the royalty percentage is constant, any ninth grader knows that Rambus' income will fall. I never considered the possibility that the computer memory market would contract! If someone on the Rambus discussion board brought it up, I certainly don't remember, because I filtered it out. Hey, the stock climbed 600% within months of my purchase -- the sky was blue! But computer memory prices did collapse, and Rambus' revenues followed suit. Oooops. Wish I'd played the devil with that holding. Maybe I would have sold.

Now, I'm not talking about accepting rudeness, disrespect, or violence from those who disagree (though violence has not, to my knowledge, stopped anyone on our discussion boards). And not everyone who opposes us is thoughtful (nor is everyone who agrees with us). Any participant in the town square of the Internet must, as in life, have a thick skin. But one thing I love about our discussion boards is that, since we went subscription, the civility has gone way up, and the drive-by shootings have diminished (but not the good-natured shoot-'em-ups, which are fun). The already amazing amount of civil disagreement has increased. We will all profit.

I hope that in my investing career, and in my life, I can strive to go beyond labels and lapels to hear thoughtful opposing opinions. I'll still be forceful in my views -- that's just the way many of us are -- but I'll try to remain open to the possibility that they are wrong or could be made stronger. 

And you? Check out a discussion board (30-day free trial) about a stock you own and analyze opposing viewpoints.

Have a most Foolish week! Updated port returns below.

Tom Jacobs (TMF Tom9) can now reveal that, because he declined the opportunity to join the mob last year, The Sopranos asked Christopher instead. At press time, he owned shares in Millennium Pharmaceuticals. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.

Rule Breaker Portfolio Returns as of 9/16/02 Market Close:

            RB        S&P     S&P 500
            Port      500      DA*    Nasdaq
Week      -2.80**    -1.31%   --      -2.20%
Month     +2.22%**   -2.25%   --      -3.95%
Year     -26.78%**  -22.38%   --     -34.58%
CAGR 
 using IRR***
 since 
 8/4/94  +20.66%     +8.53%  +10.47%  +7.29%