Friday, January 27, 2006


Good investors should learn about "mind sets". For the past 5 years, my wife and I have dealt with the very complicated business and legal matters required to "un-wind" and sell a small business. During the process several parties declared that "'so and so's' (people in a certain professions) are idiots". Marilyn and I, with the benefit of hindsight, have learned how naive (perhaps stupid is the correct word) we have been about certain matters. In other matters we have been very careful and very smart, for example, we dated for 5 years before marriage and have been married almost 34 years. We have used good judgment in the most important decisions in our lives. We have worked at being faithful servants and good parents. Although we managed to build a successful business, we allowed it to grow to large and it came close to ruining our lives. It was over ten years ago when the business virtually took control. Having fought negative cash flow for 10 years perhaps helps explain how I can see value in AMR and CAL. Those who have fought negative cash flow know all about the task of fighting alligators while trying to drain the swamp. The good news is that we and the business survived and that, in general, we have lead happy and fruitful lives. Naive and stupid at times, yes; idiots no!

When one runs a small business, one makes countless mistakes. Most of the mistakes are small but one occasionally does something really dumb. A good friend recently explained that those in other occupations are not idiots but that they simply see things from their "mind set". An accountant, a banker, a government employee, a lawyer, a business owner and an investor all see things trough glasses of different colors. One businessman might understand and appreciate why a businessman took a certain course while a lawyer or accountant with different frames of reference, may have a hard time "walking in the businessman's shoes" and vise versa.

Another good friend took me to task yesterday for misleading him. He was right to do so. He made me realize how poorly I sometimes communicate. I did not misinform him on purpose but, when I told him a set of facts, I focused on what was important in my "mind set". After he took me to task, I realized, even more, how dumb a decision I made in an important matter about 5 years ago.

The interesting thing is that, while I consider this friend to be one of the smartest people I know (off the chart IQ smarts), In my opinion, he is a poor investor. I could be wrong because I don't really know his holdings. I simply know that at various times over the years, when I was very confident about good investments that proved to be smart choices, he was typically going in the opposite direction. I don't believe he reads this blog. I know he makes a great deal of money but, as far as I know, much of it goes into ultra conservative investments inside his 401-K.

When CAL and AMR were at or around $9 to $11, I tried to convince him and others that these companies had made the "turn". The "national mind set" in regard to airlines was so negative that, even those knowing my investment track record, could not believe I had a clue about AMR and CAL. I think my friend is like so many others who don't add beta to their portfolio until after the economic outlook is rosy. They get burned by adding beta near tops and they then find it emotionally difficult to be aggressive near bottoms.

The good news is that I have gained much "perspective" in recent weeks. I have lived through the most stressful time of my life and I believe I am a better person for it. I have often written about Ken Fisher's belief that if you can find where the majority of folks have the wrong mind set about something, then there is the opportunity to make a lot of money. The airline business is a great example as I believe AMR and CAL are on their way to $100 per share in relatively short order. However, the point of this article is that when you have dealings with those in other occupations, it is important to realize that you must listen and speak very carefully to communicate with them. When dealing with lawyers or government officials, one can easily believe there is understanding when there is not. A lot of things that are very important can very easily get lost.

Learn about mind sets. Study human nature and realize that investing is not just about the numbers. Investor psychology is very important. Right now, investors hold about 5 trillion dollars in short term "safe" investments. Investors are also stocking up on gold as if they believe modern civilization is about to end. There is opportunity in this market. Remember that when the over riding mind set is one of fear, one should invest aggressively and when the over riding mind set is one of greed, one should be cautious. The fundamentals say that oil is in ample supply and yet the price is staying very high due to fear. Avoid oil investments, near the top, and build positions in other areas as an explosive "market melt up" is near.