Why did President M-son incur a huge loss due to a faulty decision? The psychological traps investors commonly fall into
Hello, this is Koyama.
“Regarding the results announcement this time, it is a complete mess.
It is a huge loss, red ink all over...,”
The shareholder meeting held last week
for SoftBank Group’s earnings briefing
began with such words from Masayoshi Son.
“SoftBank Group Earnings Briefing Video”
↓
https://webcast.softbank.jp/ja/detail/video/ref:20191106_01_ja）
And at the opening of the briefing,
they spoke about the WeWork issue that has been covered recently
“We regret that our investment judgment was flawed”
was stated.
However,contrary to those words
there was also a sense of calm from Mr. Son
One reason is
the “shareholder value” that Mr. Son absolutely prioritizes
in other words, the amount of “net debt subtracted from held shares”
has risen from 20.9 trillion yen at the last briefing to 22.4 trillion yen,
which is a fact.
Why has “shareholder value” increased?
The biggest factor is that Alibaba's stake has
increased by 2 trillion yen.
WeWork’s negative impact also
is not small,
but even more than that, due to Alibaba stock
the shareholder value has increased,
so there is no need to be worried, in other words.
Furthermore,despite being historically large losses since founding,
the average performance (IRR) of venture capital firms worldwide, about 5,000 firms,
is around 13% per year, whereas
they are able to achieve roughly double that IRR,which was emphasized as well.
Although the performance has declined since before,it still remains above the global average.
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Why did we overpay for WeWork?
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Nevertheless,regarding the investment in WeWork
there are glaring negative points,
and in the Q&A session of the briefing
a question straight away asked
“Why did you buy WeWork at such a high price?”was posed.
Mr. Son answered that there were two reasons.
One is,
“In the round just before our investment,
other investors also invested at roughly the same amount,”
which is true.
The other is,
“we overestimated the CEO Adam Neumann.”
That’s right.
In other words,they were swayed by the judgments of other professional investors,
and moreoverfell in love with Adam Neumann
to the extent that the negatives became invisible,
that’s what happened.
“For someone like Mr. Son, to make such a mistake...,”
was the impression,too.
If someone of Mr. Son’s caliber
possesses information that the world cannot access,
he surely has plenty of it.
Therefore,other investors and
the negatives of the CEO and other thingsare likely judged accurately by him.
Yet,it is surprising that he could not do so effectively.
However, from a human psychology viewpoint,
in a sense, it is inevitable.
Because people tend to cling to their own ideasas they have more information.
They cannot accept opposing views.
Why?
There is an answer in the following passage.
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Paradoxically, as people gain abundant information,
they cling to their own opinions even more.
Because it is easy to find data that supports their view.
Tari Charlotte
'Why Facts Don’t Change Our Minds' (Hakuyosha)
August 30, 2019, First Edition, First Printing
P.27
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The more information you have,
the more you are exposed to information that contradicts your view,
and of course, there is also more information that justifies your view.
And,humans tend to
focus on information that justifies their own thoughts.
Of course.
No one wants their own ideas to be challenged.
The truth is not clear, butperhaps Mr. Son
this time also
was focused on information that justified his own thinking,
and became excessively attached to his own ideas.
By the way,
there is a tale that George Soros, a world-renowned investor,
continues to seek evidence that disproves his own hypotheses
— a story I mentioned in a previous newsletter,
intentionally seeking information that disproves his own thinking
is a stance that brings profits to investors.
How about you?
Are you avoiding information that disproves your own thinking?
For example, when you think
“I want to buy this stock,”
from the moment you think so,
you end up seeking reasons why you should buy it?
Do you ignore news that would show the stock price could fall,
or dismiss it as nonsense?
Unfortunately,if you face investing with such an attitude,
no matter how good a method you use,
the probability of earning stable profits is zero.
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The stance of successful traders
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By the way,
people say, “Shōzan’s wave-riding investing method is no good, don’t use it,”
but when you listen to them,
those who say that tend to be people who are
stubborn about their own ideas.
For example,even when conditions worsen,
they actively look only at information that is favorable to them,
and reassure themselves forcibly.
If you hold a long position,
you tend to focus on news that suggests stock price rises
and try to convince yourself.
If you do such things,
it is obvious you will lose funds eventually.
As mentioned earlier,regardless of the method used,
clinging to your own thinking leads to the worst outcomes.
“If you realize your thinking was wrong,”
by then it is already too late.
A trader who consistently earns profits
always considers both the possibility of price going up
and going down,and what to do in each situation in advance.
No matter what method you use,
please be careful not to cling to your own thinking.
Today as well,thank you for reading until the end.
.
Keizo Shitayama
