Narrative fallacies and cognitive bias in WSJ blog brings forth the warm glow of appreciation for Graham & Dodd

Cognitive bias is easy. The phrase “grasping at straws” comes to mind when scanning this latest sorry entry however:

  • “Investors in the company were spooked enough by the incident to drive BP's shares down by as much as 2.6% in London trading Monday, wiping $2.4 billion from its market value."
  • “BP does not directly operate the Trans Alaska pipeline."
    • “is not even the largest shipper of oil through it. However, BP stands to lose the most if the shutdown is prolonged"
    • “As BP's new Chief Executive, Bob Dudley, said in an email to employees in October, a single issue could still endanger the company's recovery from the Deepwater Horizon explosion and oil spill ‘Every day we operate safely we earn more trust, but a single problem could jeopardize the recovery.'"
    • “There have long been serious questions about BP's ability to operate safely in Alaska."
    • “The leak from the Trans Alaska pipeline reported Saturday does not in itself appear as serious as previous incidents. Just 10 barrels of oil leaked, all of which were contained within the basement of a pumping station."
  • However, it is making headlines because of the spotlight on BP and is an unwelcome reminder to investors of the uncertainty that surrounds the company, said Colin Morton, a fund manager at Rensburg Fund Management, which holds a stake in the company.
    • “Sentiment toward the stock has improved…[but] we still can't say with any absolute confidence that there isn't any more bad news to come," he said.

Grousings from the peanut gallery whilst still long BP:

  • the subsequent move up during the course of the trading day, after the opening hour, no doubt caused more than a little irritation by failing to follow the narrative bias; I was particularly impressed by the throwing in of the dollar figure, as in the stock phrase “wiping $2.4 billion from its market value." This wiping is the evidence I was looking for that investors were indeed spooked.
  • because BP does not operate the TAP, I was left to hang: how do the subsequent points follow? Unfortunately the article doesn't say.
    • it is not the largest shipper and therefore BP stands to lose the most because...?
    • we seem to have concluded that this is an “issue" for BP: not sure why.
    • Every day we operate safely we earn more trust; “we" and “operate" seem to be the missing elements.
    • I am feeling rather dumb for not being able to figure out how long held serious questions about BP's ability to operate safely relate to TAP.
  • oops, I thought it was making headlines because the reduction in flow to 5% of capacity could reduce US oil supply by as much as 15% and thus affect oil prices
    • it raises an existential question: can we ever say with any absolute confidence that there isn't any more bad news to come in any equity or debt issue? If we could find something where we held absolute confidence, wouldn't we be setting ourselves up for disappointing returns by overpaying (say as implied in the valuation of Facebook)?

A deeper question: wouldn't the best investment be in the issues where confidence was the lowest, buying when the crowd is most pessimistic (where one can determine one is obtaining the greatest value)?