We love stories, not facts

Posted in Blog
16/02/2021 Mduduzi Luthuli

Think about your favourite movie. What was the name of the main character? What did you like about him or her? What happened to the character throughout the movie? You can probably recall the plot in great detail.

Now think back to the last quarterly update your organization’s leadership sent in an internal memo. Maybe you can recall a statistic or two, but I’ll bet you’d be hard pressed to recount any significant portion of the report to your colleague who hasn’t read it yet.

That’s because there’s no story to tell. No narrative arc, no emotional moments, no suspense, no climax. Just the facts. And people find facts boring and easy to ignore. Research shows that messages delivered as stories can be up to 22 times more memorable than just facts. It’s an often-cited statistic, and for good reason, even if that multiplier may be a bit hyperbolic.

Stories help us simplify the world to fit within our biased viewpoint for it to make sense. Stories help us justify making irrational decisions by organising abstract, complicated material into a meaningful structure.

Researchers at Ohio State conducted several experiments on cognitive processes that occur when we become immersed in a story. They call that feeling — of being so lost in a narrative that we hardly notice the world around us — transportation. 

And they discovered that when we’re transported by a narrative — whether it’s true or imagined — we tend to view the protagonist more favourably and embrace the beliefs and worldviews the story presents. Most importantly, though, we tend to believe the story more readily than we would believe a non-narrative account.

This is because our brains actually process narratives differently. When we’re taking in straight information, we’re paying critical attention to the message — reaching back for our own existing knowledge and opinions and actively analysing what we’re hearing.

When we’re transformed by a narrative, however, our single focus is on the story. We absorb it entirely, without pausing to deconstruct or doubt what we’re hearing. We’re truly swept away, and this makes us more likely to embrace the ideals and messages the story is promoting.

This is what happens when we invest based on a narrative, a good story shared around a braai, as opposed to facts. Because facts are “boring” and require time and effort.

We can’t tell people what to do with their own money. All we can ask is for people to stop and think. Don’t simply invest because others are doing so. Don’t invest based purely on speculation and hot-stock tips. Invest your money only when you understand the consequences and risks of doing so.

What is the investment case? Does this investment make business sense? How can I lose money with this investment? How will this investment help me achieve my personal objectives? What’s my exit strategy if I’m wrong? How does this investment affect the risk profile and mathematical expectancy of my portfolio?

Being a good investor is learning how to ask the right questions in order to assess if you’re investing or speculating. When we don’t stop and take the time to consider our options, we go through the motions as if we’re on autopilot.

Instead of conducting our own research, we look around at what others are doing and simply copy what we see. It’s important to become aware of this tendency if your aspiration is to become a critical thinker and profitable investor.

Once you’re aware of the natural tendency to go with the “social default,” you can begin making more conscious decisions for yourself. Rather than simply being part of the herd, develop your own opinion. Understand what you own and why you own it.

Rather than adopt the herd mentality, educate yourself about your choices so you can make a well-informed investment decision. Do not invest based solely on a good story without taking the time to see if it’s indeed factual. If you’re investing based on a narrative as opposed to a repeatable and sustainable strategy based on mathematical expectancy, all you’re doing is speculating; living on a hope and prayer.

We find that because people know so little about the stock market, they choose to believe it’s random, unpredictable, and dangerous. But in reality, stocks are not a random game of chance in which the long-term odds are stacked against you. Actually, it’s quite the opposite.

There are many strategies that have been proven, through extensive research, to boost investing profits over the long term. There has never been a 15-year stretch over the last century when the global stock market didn’t deliver a profit. And it has delivered a profit in 94% of 10-year periods, and 86% of 5-year periods.

This brings us to the single biggest reason why most investors fail to make money when trading the stock the market: lack of knowledge. We can also put poor education into this arena because while many do seek out education, they look in all the wrong places and, therefore, end up gaining a poor education.

Our team meets people on a daily basis who come to us for help after losing money trading in the stock market. These same people refer to themselves as investors/traders simply because they’ve bought and sold shares before.

But when questioned about how they analysed the stocks they were buying or selling, many claim they read reports in newspapers and on websites, and occasionally looked at online charts with their broker. When questioned further, they reveal that while they had a rough idea of the fundamental information they needed to assess a stock, they had little or no idea what they were looking at when it came to understanding how to interpret a chart. And none had a plan or understood anything about money management. 

They invested based on a good confirmation-biased story, not a competent comprehension of the facts.

An educated investor, however, understands the importance of developing a profitable investment plan, how to analyse a stock to know why they are buying and selling, and how they will manage the trade. More importantly, they also implement strong money management rules, such as a stop-loss and position sizing to ensure they minimise their investment risk and maximize profits.

If you take your money and spread it recklessly around a bunch of stocks without doing any research and you’re just hoping to somehow get rich quick, that’s not investing, that’s speculating on a luck-based strategy. Or, if you put all your money into a single red-hot “can’t lose” stock plastered all over the news headlines, that’s being transported by a narrative.

Saying investing in stocks is like gambling is sort of like saying, “Driving a car is incredibly dangerous.”

I mean, sure, if you drive backward down a one-way street at 200km/hr with a blindfold on, you’ve got a death wish. But if you drive the car safely and properly, following common traffic rules and avoiding well-known risks, it’s not that dangerous.

In that case, driving a car provides a ton of value in your life and comes with an acceptable level of risk. It’s not a negligent or unreasonable act. It’s the same idea with stocks. If you do it wrong, it can be incredibly dangerous to your wealth. But if you do it right, it can provide you with a ton of value for an acceptable level of risk.

If you need help creating and managing your investment portfolio in a fact-based manner, contact us on info@luthulicapital.com

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Any fool can know. The point is to understand - Albert Einstein