Recently, I attended a session on value investing at a London Value Investing meetup where we discussed various value investing ideas. During the talk, the discussion came on TESLA Motors and Elon Musk. Few participants were of the opinion that TESLA is an excellent investing opportunity not necessarily because of it’s fundamental value but because they liked Elon Musk. There is no doubt that Elon Musk is a visionary- which we all agreed- but does TESLA stock provided (value)opportunity just because Elon Musk is a visionary?
Based on this background, I asked myself ” How Warren Buffet dealt with the similar situation in the past? Did he bet on somebody because he knew them or he looked for some other parameter before investing: The found two clues in his autobiography- The Snowball:
Here is the first one
In 1968 Bob Noyce, Gordon Moore (its research director of Fairchild Semiconductor), and its assistant director of research and development, Andy Grove, had decided to start a nameless new company in Mountain View, California, based on a vague plan to extend the technology of circuits to “higher levels of integration.” They were helping to raise $2.5 million for the new company—which was soon to be named Intel, for Integrated Electronics.
And as much as Buffett admired Noyce, he did not buy Intel for the partnership, thus passing on one of the greatest investing opportunities of his life. While he had lowered his investing standards in difficult environments—and would do so again—one compromise he would never make was to give up his margin of safety. This particular quality—to pass up possible riches if he couldn’t limit his risk—was what made him Warren Buffett.
The second story is about Bill Gates. Warren Buffer came to know to Bill Gates in 1990’s, before he become the richest person in the world. Bill Gates impressed him with his talents and his authority of technology. Bill Gates enhanced Warren view on technologies and the impact of the internet on the businesses. Bill Gate became one of the close friend of Warren Buffet, but that does not change Buffet’s view on technology company or Microsoft. He did not buy Microsoft for the same reason why he shied away from Intel. If Warren had wished, he could have bought a stake in Microsoft, but he preferred to stay away from it due to the aversion to technology.
In both the case, Warren Buffet knew Bob Noyce and Bill Gates well, but that does not mean he invested in their company. He could have bought a huge stake in both of them, but he did not, because in his view technology was outside of his area of competency. Maybe, he was aware of Halo effect and avoided it’s influence.
As per Wikipedia
The halo effect is a cognitive bias in which an observer’s overall impression of a person, company, brand, or product influences the observer’s feelings and thoughts about that entity’s character or properties
Example- “In the classroom, teachers are subject to the halo effect rating error when evaluating their students. For example, a teacher who sees a well-behaved student might tend to assume this student is also bright, diligent, and engaged before that teacher has objectively evaluated the student’s capacity in these areas. When these types of halo effects occur, they can affect students’ approval ratings in certain areas of functioning and can even affect students’ grades.”
Daniel Kahneman – a Nobel laureate and the author of “ Thinking Fast and Slow” has provided excellent example of Halo effect in his early career:
Early in my career as a professor,I graded students’ essay exams in the conventional way. I would pick up one test booklet at a time and read all that student’s essays in immediate succession, grading them as I went. I would then compute the total and go on to the next student. I eventually noticed that my evaluations of the essays in each booklet were strikingly homogeneous. I began to suspect that my grading exhibited a halo effect, and that the first question I scored had a disproportionate effect on the overall grade. The mechanism was simple: if I had given a high score to the first essay, I gave the student the benefit of the doubt whenever I encountered a vague or ambiguous statement later on. This seemed reasonable. Surely a student who had done so well on the first essay would not make a foolish mistake in the second one! But there was a serious problem with my way of doing things. If a student had written two essays, one strong and one weak, I would end up with different final grades depending on which essay I read first. I had told the students that the two essays had equal weight, but that was not true: the first one had a much greater impact on the final grade than the second
If the observer likes one aspect of something, they will have a positive predisposition toward everything about it. If the observer dislikes one aspect of something, they will have a negative predisposition toward everything about it
I think the Hallow effect influenced the participants. They liked Elon Mush- who is called Genius by Chalie Munger- and projected their thinking into the company TESLA.
What do you think? Do you agree to my conclusion?
Note– I am not analyzing TESLA stock, I am using TESLA just as a discussion point and not recommending it as a stock to buy or sell.
Whenever you find yourself on the side of the majority, it is time to Pause and reflect-Mark Twin