Much ado about borrowing

I was really hoping to rip into this post from Intern Investing until I actually read it and realized it is quite well done. (I’m not surprised.) So instead, I am going to borrow heavily from it. Which seems appropriate for the topic.

One of the buzzwords I am getting tired of hearing is talk of “borrowed conviction.” The concept is that it is bad to buy a stock based largely on someone else’s research, and someone else’s conclusions. There needs to be some of your own skin in the game, some reason you decide that you need to own the stock.

There’s certainly a lot of truth to the argument. If you are buying simply based on what someone else thinks, you might as well just outsource the process entirely to a financial adviser or a mutual fund. And it is a great way to fall for pump and dump schemes!

Still, it feels like a lot of the talk is noise. (Not the Intern post, which is why I’d recommend reading it.) My sense is you mostly only hear these sermons about borrowed conviction during turbulent market times. I think there is a reason for that.

It is only when the tide goes out that you start pointing fingers and looking at who isn’t wearing swim shorts, to paraphrase Warren Buffett. And that’s when it can be a real temptation to say, “I’m really smart. The losers are just ideas I borrowed” and miss out on what can be a valuable lesson.

I think borrowed conviction gets a bad rap. I would bet a good portion of my portfolio has a lot of borrowed ideas as its foundation. I’m not going to apologize for that.

As Mark Twain notes, new ideas are very hard to find. Perhaps not impossible, but in the context of stock investing the targets we are looking at are all listed securities out in the open for all to find. Someone inevitably has found it before you. Don’t pretend otherwise.

More importantly, a good bit of what we call doing your own homework involves borrowing someone else’s work. Few of us do the due diligence of dreams where we go personally inspect the local copper mind before buying a commodity, or kick the tires on a new prototype SUV.

At some level, nearly all of the time, we are relying on the expertise of others. It is just a matter of whether you take that wisdom upstream (research and reports) or downstream (a finished recommendation). I see no reason to shame one and praise the other.

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Take this fantastic writeup on Arthur J. Gallagher for example. Full disclosure: Prior to reading I had a vague idea that this was an insurance company but knew little to nothing else. I certainly wouldn’t have guessed it has outperformed fantastic investments.

I could be tempted to buy some Gallagher shares. If so, that would very much be borrowing conviction from Mz. Alpha. (Can I call you Misfit? Missy for short?) I could go through the song and dance of reading more about the business, looking at the numbers. But Missy has done a good overview, and has already presented a good number of pros and cons. I’d wager anything I layer on from here is incremental, at best.

I’m sure I could spin my wheels for long enough to convince myself I’ve done enough to make this idea mine, but truth is Sir Alpha has done the work.

So, do I just not buy it, then? Call it off limits because it is someone else’s work? Someone else’s conviction? That feels like a lousy reason not to buy a good stock.

Don’t be shamed away from a good idea because of talk of borrowed conviction.

Much of the bad discourse I see on borrowed conviction is focused on the wrong part of the phrase. The borrowing isn’t the problem, it is the conviction. We’d be a lot better off talking about accountability.

As noted, it feels like “borrowed conviction” talk mostly comes up in tough times when people are looking for excuses. Saying “this was based on borrowed conviction” is a clever way to both admit a mistake and give yourself a pass.

That’s a problem. At the end of the day, the decision to pull the trigger on a stock purchase is yours and yours alone. And that’s true, no matter where the pick came from.

• If you did all of the work by yourself, in a vacuum, with no outside influence at all, the decision to buy was yours and yours alone.

• If you took an idea from someone else, and did your own original research, the decision to buy was yours and yours alone.

• If you took an idea from someone else, then followed up with secondary research, the decision to buy was yours and yours alone.

• If you just bought a stock because someone told you to, the decision to buy was yours and yours alone.

The decision to buy is yours and yours alone.

Borrow all you want. Borrowing conviction is not the problem. Just understand that however you come across a stock, the second you buy it you also took ownership of the decision to own it.

There’s nothing wrong with an honest borrower.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.