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Here’s What We Can Learn From Charlie’s Two Track Analysis

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Personal Investment Reflection

Here’s What We Can Learn From Charlie’s Two Track Analysis

Chris Lee Susanto, Founder at Re-ThinkWealth.com

8 August 2018

“Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful but often malfunction?” – Charlie Munger

Charlie Munger is a smart man. He also happens to be very wise in his approach to thinking about life and investments. And yes, he is too, the vice chairman of Berkshire Hathaway that is owned by Warren Buffett – who is currently worth about $86.7B or S$118.25B.

It is safe to say that without Charlie and Warren, Berkshire would not have posted a compounded annual return of about 20% from 1964 until today.

Being an investor who seeks value all the time, I’ve always loved to think about what these two man has to say. And today, let’s see what we can learn from Charlie’s two-track analysis, shall we?

It seems like when making investment decisions, Charlie uses this thing called two-track analysis. In the two-track analysis, he recognizes that there are two factors at play when making decisions. The first is the rational reasoning and the second is the irrational/subconscious influences that are influencing this decision making.

Charlie said that the irrational/subconscious influences can be useful but often malfunction (or otherwise, not useful).

In value investing, I often said that it is more than 50% mental. Understanding and most importantly recognizing our psychological bias is key to being a good investor. And that is, in my opinion, what the two-track analysis does.

The two-track analysis focuses first on the rational factors. It focuses on facts, reasoning, valuations based on fundamentals. It focuses on the truth. Once we have done the rational thinking, make no mistake – we still can make bad decisions if we do not recognize the subconscious influences at play.

For example, if we valued stock A to be $160 but we bought stock A at $170, we might not sell it because of our loss aversion that it might go up in future.

Another example, if we valued the stock A to be $160 and it is currently $120. we might still do not buy it if the price has run up from $60 to $120 in two days – a 100% increase – we think we have missed the boat. This is anchoring bias. We anchored the stock’s original price that is $60 that has run up to $120 –  – we would not buy it even if it is worth $160 – another 30% upside to go.

It might sound ridiculous to you reading this article now but over my 3 years of experience investing, these biases are very prevalent all around.

In conclusion, what we can learn from the two-track analysis by Charlie is this: facts and reasoning that governs rational factors still comes first when making investment decisions. But recognize the fact that we are human and we have emotions, recognize the subconscious influences at play and go against it when it harms us. 

What are your thoughts? Have you had occasions where because of your emotions aka subconscious influences, you made a bad investment decision?

Disclaimer: The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.

Important: Please read our full disclaimer.

I hope you have enjoyed the article. Thank you for reading. 🙂 

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