Becoming a Better Investor: The Liking/Loving Tendency

Legendary investor Charlie Munger, in his book Poor Charlie’s Almanack, highlights 25 key psychological tendencies that influence the way we think and make decisions, in life and in investing! By recognising these latent biases, we can avoid certain mistakes and become smarter, more rational investors.

This week, we’re analysing the second tendency, the Liking/Loving Tendency, through the lens of investing.

What is it?

Charlie Munger says that humans have an inborn tendency to like and love. He illustrates this with the example of a mother goose and her gosling. A newly hatched baby goose instinctively bonds with the first kind figure it encounters, which is usually its mother. However, if the mother goose isn't around right after hatching and a human happens to be there instead, the gosling will imprint on the person, following them as if they were its parent.

But Munger says this tendency can cause us to act unwisely and make poor decisions, by:

• Overlooking flaws
• Blindly following or agreeing with the object/person they admire
• Demonstrating favouritism towards anything associated with/connected to the object of affection
• Distorting facts to justify this affection and admiration.

Munger says this is a double-edged sword, adding: “The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. With this ‘feedback mode’ in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved.”

Through the Liking/loving Tendency, we overlook the flaws of people or products we’re fond of. We see what we want to see, and continue to admire a stock even when the fundamentals and facts show us the red flags. Even serious mistakes become easier to accept if they come from our favourite brand, stock or someone we love. While it's true that allowing ourselves to like or love a person, stock, or institution can cloud our rational judgment, it’s a risk we often take without realising.

How does this tendency play out in the world of investing?

Charlie Munger’s Liking/Loving Tendency can be particularly dangerous for us as investors because it leads us to overlook red flags in companies, CEOs, industries, or even entire countries simply because we admire them. This bias can result in holding onto underperforming stocks for too long, ignoring negative data, or making irrational investment decisions based on emotion instead of logic.

Instead…

We need to practice rational detachment. We must analyse businesses objectively, questioning our own biases, focusing on the fundamentals of a stock rather than personal feelings.

We need to seek out opposing viewpoints and regularly re-assess our portfolios, to counteract this tendency and lead to more disciplined decision-making.

Objectivity is key. The main takeaway from studying the Liking/Loving Tendency is, that at least when it comes to business relationships, we need to be smart about the individuals or institutions that we admire.

Munger makes it clear that in business, admiration and respect can be productive when directed in the right way, but blind adulation and love can be dysfunctional (and detrimental to investing). In our personal lives, letting our guard down may be necessary to avoid feeling alone, but not in business: objectivity is essential! Yes, this is easier said than done, but dealing with Liking/Loving Tendency in business is certainly easier than navigating it in our personal lives — and the returns (no pun intended) will be worth it.