- Firsthand experience with Wal-Mart, and virtually all other retailers, does not constitute due diligence because of anchoring, confirmation bias and other emotional pitfalls.
- Personal experience, limited quantitative data and "hand me down" anecdotes can emotionally blind investors to investment opportunities.
- Even positive personal experiences can cause an over-weighting of business value based on emotional impact.
You Are What You Read (And Experience)
Warren Buffett said that knowledge builds up like compound interest. He was specifically talking about reading and how to get smarter.
Furthermore, Buffett said:
"We don't read other people's opinions. We want to get the facts, and then think."
However, it appears that many investors build up a certain kind of knowledge that has a negative effect on rational, long term thinking.
It's not reading 10-Ks, or annual reports, or earnings call transcripts. Instead, it is the devil of real world, practical experience. This experience blinds many investors, especially with "lightning rod" companies like Wal-Mart (NYSE:WMT).
Wal-Mart Controversy and Sources of Knowledge
Here's a small list of why Wal-Mart is "evil" in the eyes of many thousands of people:
- racial discrimination
- gender discrimination
- foreign product sourcing (especially China)
- treatment of suppliers
- exploitation of tax loopholes
- environmental impact
- suffocation of small business
The importance here is that there are two types of information that we can evaluate and consider as investors.
First, we can review source documentation (10-Ks 10-Qs, earnings transcripts) but also related legal documentation, deep investigative reporting, and the like. Basically, we can read about it. We can get source materials, consolidated data, summarizations of facts, and more. We can do research and due diligence. This type of knowledge is rather bland. It's boring. There's very little emotion here. But, it's so very useful.
Second, we can experience Wal-Mart (or almost any retailer) first hand, by visiting and walking around. We can also talk to other people about the business; friends and family, typically. We can read horror stories online easy enough. Regarding the second source of knowledge, it's visceral and real. It also has a rather strong emotional impact.
To be more specific, emotions drive behavior such as:
- availability bias
- confirmation bias
While it's possible to get sucked into the emotional vortex when using source documentation to build knowledge, it's much less likely than when using the second type of "walk around" information.
Investing in Wal-Mart (or Not) Based on Information Source
Here's what Interesting Times said about Wal-Mart:
"Personally, I am tired of driving to my Wal-Mart only to find un stacked shelves. Nice to have lower prices , but you really should have the product as well.."
Here's what spinrbait said:
"you are so right sc. i enjoy my shopping expirence with target. i despise going to Wal-Mart that said, there is more selection on many items at Wal-Mart. i needed a certain kind of grass seed yesterday. i looked online at lowes, home depot, and Wal-Mart. Wal-Mart was the only one that had it. i didn't even try target"
And, here's what Stickmanwithahaircut said:
"This is a holdup. Hand over your money right now. I can't support Wal-Mart or Target Industries for taking over our largest welding and mechanic garages to use for warehouses, or our largest indoor carlots for zealot competition. This capitol thievery must end of our small town banks AND SMALL TOWN re consolidation."
There are many other examples. These anecdotes about Wal-Mart (good and bad) provide us all with more and more knowledge, but it's this kind of knowledge that clouds the mind.
Stories and specific examples cause investors to "anchor" a small sample of data into large conclusions. If we are personally and emotionally biased against Wal-Mart then these stories "confirm" we are right that the business is evil, and is probably a bad investment.
"So they start with a poor image as a retailer in Canada, and believe me their image is simply awful, and have to lure the same disappointed shoppers to stores that leave much to be desired."
"I think you're putting to much into their "brand power". People who can afford it want their dogs boarded at a nice independent place not a puppy mill like petsmart."
In fact, it's pretty easy to find horror stories with just about any retailer, online or off.
What's interesting is that this personal experience, and vicarious experience, often causes us to ignore direct data. We don't seek it out because we already "know" the company stinks. Or, because it's more difficult to find. Third, it's just not fun to look at charts and graphs of customer satisfaction ratings, or industry peer comparisons.
How to Shatter Retail Investing Myopia
I feel like I'm preaching to the choir or that I'm acting like Father Knows Best. That's not my intention. I often make comments about companies based on personal experience, few data points and hearsay. Guilty as charged.
That said, charts like these are far superior to emotionally charged, personal stories:
- 15% dividend growth rate over 8 years
- Slight advantage in rate of return vs. S&P 500
- 23% to 37% dividend payout ratio
And, there's more in that little snapshot, too. When looking at that, I don't get too emotional. Maybe a little greedy? But, really, the emotional impact is far less than what I see here:
"Wal-Mart donated millions of dollars to dozens of local nonprofits, including the NAACP (Los Angeles chapter of the NAACP has also awarded its Lifetime Achievement to Wal-Mart), the Urban League, Homeboy Industries, California Charter Schools Association, Goodwill, Los Angeles Parents Union, Catholic Charities, Local Rescue Missions, Salvation Army, Meals on Wheels, Chrysalis, Mexican American Opportunity Foundation, and the Children's Hospital, as well as several Asian American organizations like Little Tokyo Service Center, the Center for Asian Americans United for Self-Empowerment, Korean American Coalition, and Chinatown Service Center. Wal-Mart is the most generous retailer ( 1 billion + ea year in goods and services) on the planet."
Notice that this is a very positive statement about Wal-Mart. It's not always the negative stuff that drives emotion.
The key take-away is that it's virtually impossible to use a handful of personal stories and anecdotes as the basis of investing, especially in a big box retailer like Wal-Mart.
Furthermore, using your own personal shopping experience, in one town, or one location, does not constitute due diligence. However, that kind of experience does provide an investor with a high level, cursory understanding of how the franchise operates, how it markets itself and what products and services are provided to customers.
As I was wrapping this article up, kevinconway wrote this:
"When evaluating a Retail company it is dangerous to make decisions based on local observations."
That nails it.