Legendary investor Bill Miller argued that there are three competitive advantages in investing: 1) information - knowing something meaningful that no one else knows, 2) analytical - you’re better at Excel (or telling Claude how to do Excel) or making better decisions after your Excel analysis or 3) psychological - you’re somewhere better at controlling your behavior.
Personally, I’m never winning at any of these 3, but if I had to choose one of these competitive vectors where I think I can potentially be better than average, it’s the psychological one.
It’s not lost on the investing greats that psychological mistakes in investing can be costly. The late Charlie Munger gave a speech titled “Psychology of Human Mis-judgement” where he listed 24 such misjudgments. You can find the speech on your own, it’s worth a read.
Today, there is one area that feels ripe with the potential for value-destroying misjudgment, and that’s in the realm of “social contagion”.
Author Luke Burgis wasn’t writing about investing when he penned his recent work The One and The Ninety-Nine. He was writing about 'mimetic desire' and social contagion, forces that cause us to lose our ability to think objectively, becoming trapped in cycles of unconscious imitation and dopamine-driven culture.
Much of what Burgis wrote is deeply relevant to investing, insofar as you believe psychological factors can be a competitive differentiator both for investors themselves and for businesses.
I've found that the market operates as a massive amplification machine for social contagion. Most participants look to their peers to determine what is valuable, at times creating speculative bubbles. Burgis's concept of the "Solid Self" explains the rare investor who can stand alone against this pressure. This individual maintains a firm grasp on their core purpose, ignoring the frantic herd. The "pseudo-self," conversely, remains highly vulnerable to the daily price fluctuations of Mr. Market. Because the pseudo-self is constructed from the borrowed opinions of others, it shifts constantly to align with the consensus. It checks its screens constantly, chasing the latest popular trend.
In my last post, I further discussed the business model of ‘scale economics shared’ found in Costco and Amazon. At a deeper level, these types of businesses believe in integrity over achievement indicators. They resist the pressure of corporate social contagion. Wall Street routinely demands that businesses maximize short-term profits. Analysts scream that a company should raise prices to capture margin immediately. It seems to me that it is possible that many corporate executives operate from a "pseudo-self" that quickly caves to this institutional consensus to avoid looking conventionally wrong.
A "Solid Self" business operates under a completely different logic. Jim Sinegal and Jeff Bezos built their organizations around an unwavering dedication to the customer. They voluntarily capped their gross margins, passing all scale-driven cost savings back to their customer base. This deliberate restraint is what Nick Sleep called an "anti-locker room" mentality. By refusing to join the competitive point-scoring of their peers, they built a compounding machine that defies traditional mean reversion. I suspect this level of corporate delayed gratification is only possible when a firm is anchored by an unassailable internal character. Such companies are willing to look highly inefficient to first-level thinkers because they are playing a much longer game.
To survive as an investor, you must seek out these rare, non-conforming enterprises. It is easy to buy index funds and accept average results. Escaping the crowd, however, requires you to back leaders who can stand alone like the "One" against the "Ninety-Nine." Your psychological edge comes from aligning your capital with businesses that possess this exact structural integrity. The next time a stock in your portfolio is penalized by the market for choosing customer trust over immediate profits, don't panic. Check the structural plumbing of the business and have the patience to sit on your assets.
XTOD: "The big money is not in the buying or the selling, but in the waiting." — Charlie Munger
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