One Bias at a Time Part 2: From Dog Poop to Bentleys
James faces tough questions from Lisa and learns a harsh lesson about self-serving bias.
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New here? I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. I write an algorithm that does exactly that.
How it all started. The journey so far.
"The dog is the only creature that loves you more than he loves himself."
- Josh Billings
In my last article, I covered attribute bias. We peeled back the layers to reveal how it grips our judgment.
Today, James Moneymaker will fall into another bias trap. It is important to see different angles because many biases intertwine and overlap. This time, we’ll explore how self-serving bias can cloud even the most experienced investor’s mind.
James is back in his stylish office, and sunlight is pouring through the windows. Today, he’s in a reflective mood, mulling over his recent investments and performance. On his desk lies the financial report from one of his latest private equity moonshots, TechTide Solutions. The startup, offering a dog poop removal service, had shown promising results but recently reported disappointing quarterly numbers.
He reads the section where management explains the poor performance. “Market conditions are tough, and due to supply chain issues and higher taxes on Chinese meat, dog food got more expensive. Dog owners have to budget harder. Dogs therefore don’t get that much food. James adds “… and shit less...”.
“Unpredictable taxes and supply chain issues, no one could’ve seen that coming. Sure.”
Right at that moment, his phone buzzes.
A text message from Lisa Luck, his diligent and Misses Perfect investment partner. They had planned to meet and discuss the last deal. James couldn’t help but feel a bit defensive, foreseeing Lisa’s critical questions about his recent board meeting.
Later, at the downtown bistro ThePlaceToBe.
James greets Lisa with a stiff smile that’s more strained than usual. After some light pleasantries, Lisa dives right in.
“James, I went over TechTide’s report. It’s far from great. What happened?”
James sighs. “It’s the market, Lisa. Those taxes hit them hard, and the supply chain disruptions were unforeseen. Nothing we could’ve done, really. I mean, if money is tight, dog owners have to save money wherever they can – and they do. So dogs eat less – ergo, there is less poop on the streets to pick up. Right?”
Lisa raises her famous eyebrow. “Sure. Macro factors play a role, but what happened?”
James shifts uncomfortably. “Well, I suppose there were some management issues, but those aren’t on us. We did our part.” Lisa pins him down with her blue eyes and James adds. “I mean, I can’t stop the CEO from buying Bentleys for the management team!”
Lisa leans back, her thoughtful sip of iced tea is a familiar run-up for her diplomatic machine gun.
“James. We tend to attribute our successes to our skills but blame failures on external reasons. It’s natural. But it can blind us to important lessons. Have you ever heard about self-serving bias?”
James frowns. “Self what?”
Lisa nods. “It’s the tendency to credit ourselves for successes and trivialize failures. This makes it so hard to learn and understand where we had our place in this complicated equation. And since we own 33%, we have the right to ask tough questions - even to the CEO.”
James sighs. “Yeah. The Bentley thing felt wrong. But where do you draw the line? What’s okay, what’s not? And who could have known, right?”
Lisa smiles. “It’s a tightrope walk. The bird’s-eye view is like this: When you succeed, recognize the external reasons that helped. When you fail, own it. I mean, if they had leased the Bentleys instead of buying them with cash, we would have saved the quarter. Right? And I don’t need to stretch the point that you could have also questioned why they need Bentleys at all. Especially now that they are just start making some money. James, you’re a nice guy. Often way too nice, and they know that.”
James nods. “So, what do we do?”
Lisa pulls up a chair. “Let’s dissect. You are responsible for the money our investors give us. Right? So act in their best interest. What you could have done better is to remember your role and own it. Would you buy a Bentley under this context?”
James shoots back, “No!”
“Why is the market getting all the blame for that crappy quarter? I mean, why the hell did they buy a Bentley, no, 8 Bentleys? How much is that? 2 million?”
James hesitates to answer, “Usually 1.6 million, but they got a 100k discount.”
James’ mind wanders to a past investment before Lisa joined. It was a biotech startup that had failed spectacularly. At the time, he blamed the unpredictable regulatory environment. Did he missed that one too?
He looks at Lisa, who’s patiently waiting for him to process his thoughts and his last answer. “I get it. Self-serving bias isn’t just about blaming external factors for failures; it’s also about failing to recognize all the factors contributing to our successes and losses - including my responsibilities.”
Lisa grins. “Exactly. And by recognizing this, you’re on the right path. Now call the CEO and tell him what we’ve talked about. Tell him he needs to find a 1.5 million dollar solution - fast.”
James is ready to ride the bull. Armed with this new understanding, James is ready to rock the boat at TechTide Solutions.
Later that day, James and Lisa meet again to review their other investments. As they go through their portfolio, James brings up another startup, PetroProfits, which had recently experienced a setback.
“I think we should reconsider our position in PetroProfits,” James suggests. “They missed their revenue targets for the third quarter, and their new product launch was delayed.”
Lisa hesitates, her brow furrowing. “But PetroProfits is led by Sarah, remember? She’s from our alma mater, and I’ve always trusted her instincts. We should give her team more time.”
Now James raises an eyebrow.
Tune in next week as we slice Lisa’s bias.
Behind the Scenes
The Progress
I went through my day-to-day code step by step and found - a bug: I was miscalculating dividends. I summed them up twice, which is obviously wrong. I even remember how it happened. This occurred when I tested an alternative method to make the overall calculation faster and forgot to remove the extra line of code. That’s on me.
To ensure there were no other issues, I reviewed all my code line by line. Fortunately, everything else is fine, though I had to restart the training process. I began again with 500k liquidity, and the 2 million will follow. So far, the returns are still good as I could see at first glance.
The good news is that the code is now running smoothly. I took the time this week to clean it up, and it’s paying off.
The Plan
Run the calculations.
What’s on my head
Do you know the book Between a Rock and a Hard Place?
The book is about Aron Ralston. It details his harrowing experience in 2003 when he became trapped in a canyon in Utah, with his right arm pinned by a boulder. After five days, Ralston was forced to amputate his own arm to free himself. In one section of the book, he says something like this. “This rock was waiting here for me for who knows how many years. The rock was patient because it knew I would find it.” That’s how I felt about the dividend code line. It was waiting there to be discovered. :-)
Nuggets
Go read that book. (No affiliate link)
Hit that heart if you love to think about yourself!
Michael
Recommend The Economy Rocket to your readers and friends
I share my stock investment story without sugarcoating – you get the good, the bad, and those tricky ego trips. I'm developing a service with a mix of smart code and proven investment strategies, making stock analysis a thing of the past if you wish. Why? Because life offers so much more beyond the confines of stock analysis.
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.