how the best story wins

I was fascinated to read about an author named Yuval Noah Harari who has sold over 27 million books. His bestselling book is called Sapiens, which is an anthropology book about the history of humankind.

The remarkable part of the story is that he admits he did not do any new research. He merely took what is common knowledge and presented it in a new way. Presenting beautiful, captivating stories in a way better than others can tell have made him wildly successful.  His success has lessons for us and our money.

All of us are wired to find a simple narrative that helps explain the complex world we live in. Oversimplifying the world might let us live in blissful ignorance, but it also can come with a steep price.

In the investing world, it happens every day. All you have to do is tune into the business news to find a simple explanation for why complex markets moved that day.

Recently, the market was down in the morning and then up. The news I heard confidently explained that because of the Fed Chairman’s remarks, the markets recovered.

Never mind that Chairman Powell didn’t say anything new or unexpected. The narrative is simple to understand and an easy explanation for a journalist to make sense of an up and down day. Case closed.

But what about a specific investment narrative?  I found this story put out by CNBC  recently on how Bitcoin will increase 100 times over its current value. That’s the kind of narrative I want to read now that I’m long bitcoin! It’s a powerful story and it may be true, or not. How should we process a sensational narrative like this?

First, I think it’s a good idea to consider just how much difference a good story teller, like Yuval Noah Harari, can make with the facts.

I’d be the last one to tell you if Tesla is a good investment or not. But what I am confident of is that Elon Musk is a gifted storyteller. He grabs our attention and imagination with his vision. It’s worth asking if Tesla is worth more than the nine largest auto makers combined because of future earnings, or is it just a great narrative that investors have bought into?

History is littered with stocks that soared on a great story, but when reality caught up, they crashed and burned. Remember such names as Webvan? The exciting story of home delivery of groceries led the stock to double on the first day it traded to $30, only to go bankrupt when the results didn’t live up to the hype. Or the famous Super Bowl ad for Pets.com? That stock lasted just 268 days from its public offering to liquidation. There are many more.

Second, its important to recognize the research that has been done in identifying narrative bias in psychology. It’s easy to see bias in different narratives political tribes adopt.  Two narratives will cause radically different conclusions when talking about the same facts. For example, it’s been shown that the candidate we support will be the one we will say won a presidential debate. It simply confirms our prior biases. The debates themselves have little impact on changing any votes.

Investing is no different. We tend to view investments from the lens of a narrative forming a simple story and ignoring the facts that don’t fit. If we already think Tesla is a winner, Musk’s narrative is compelling. If we think it’s a bubble ready to pop, Musk will sound like a snake oil salesman.

Third, investors should be aware of the constant effort to rewrite the narrative to put the storyteller’s perspective in the best light. Narratives are not static and are in constant flux.

Being born and raised in Illinois, the Land of Lincoln, I am amazed at how the narrative on Abraham Lincoln’s service to the country is still being debated. Over 40,000 books have been written on him. And yet, I see many are calling for removal of his statues and renaming schools currently named after him.

The Bulls and the Bears of Wall Street also wage wars over narratives. Bitcoin is going to go to zero, or its going to go up 100 times current value. Both are argued with religious fervency. Pick just about any stock that can be sold short and you will find raging message boards.

I enjoyed reading a Barron’s cover story recently on the stock Oracle. The article was very glowing and suggested Oracle has the potential to be the next Microsoft in moving much higher in price. However, I also read the comments following the article. Numerous posts gave lucid arguments why Oracle is going nowhere. Two polar opposite narratives from bulls and bears, but same facts.

Fourth, what can we do to overcome narrative bias and succeed as investors? I don’t think we can ever get rid of this bias, but we can take steps to mitigate the damage it can do to our wealth.

Find someone you respect who holds the opposite opinion of your investing thesis and have a long conversation. Part of the problem with politics today is that our society gathers in echo chambers and we reinforce the same arguments with each other.

Charlie Munger, the 96-year-old investment partner of Warren Buffett, offers this sage advice: “I never allow myself to hold an opinion on anything that I don’t know the other side’s argument better than they do.”  

Finally, consider if you could be falling for a pump and dump scheme by buying into a stock narrative. The message boards you are reading could be from promoters of a stock they already own. In the classic scam, they leak out false information that tells a compelling narrative about the stock’s prospects. As the stock rises, they “dump” their shares at the inflated price. Today, volume in “penny stocks,” a fertile field for pump and dump, is surging with activity.

I always assume I’m reading the thoughts of a pump and dump con man when I read a message board about stocks. It’s why I generally pass on any individual investment idea and stick to the low cost, diversified index fund approach that has been so successful over the years.

I would love to know if you have discovered ways to limit narrative bias in your investing decisions. Or, if you’re like me and limit your individual stock selections to avoid most of the problem.

Joe Kesler

Smart Money with Purpose