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Commentary: Titanic Overconfidence

By Anthony Ogorek

Buffalo, NY – This past November we traveled to Philadelphia to spend the Thanksgiving holiday (and play a little golf) with my sister's family. As you can no doubt appreciate, there was ample opportunity for what I euphemistically call "FFF" or forced family fun. This year's events provided an unexpected insight into human nature that has implications for every serious investor.

Before we delve into the main course, we would like to offer a consumer tip about avoiding $20 parking fines (as well as possible towing charges) when venturing out of our humble burb. Have you ever been confronted with two parking meters on one pole and wondered which one to put your quarters into? In the words of an unsympathetic parking enforcement officer, you have to locate the first meter that has a single head on the pole and count spaces from there. Now, don't you feel empowered?

The sleeper event of our holiday was a visit to The Franklin Institute to see Titanic: The Artifact Exhibition. What was fascinating about this event was not so much the retelling of the tremendous human tragedy, but the context in which the Titanic was built, as well as safety oversights that ultimately doomed Titanic's maiden voyage.

What struck this writer was the role that overconfidence played in the sinking of this great ship. In my experience overconfidence is a critical error that both business leaders as well as investors need to constantly guard against. It disables our natural defenses and creates unnecessary vulnerabilities. With overconfidence, success becomes more a matter of chance than design.

The building of the Titanic has been compared with Apollo, America's moon shot program. Both projects incorporated the best in technology during their respective ages. The tasks were so daunting and colossal compared with what had been attempted before, that there was an air of invincibility and wonder around the projects. As a matter of fact, these projects required the development of new techniques and technologies to accomplish their goals.

Most of us are familiar with the Titanic being unsinkable. This was a misnomer that people extrapolated based on their perception of the odds. This happens so frequently in the investment world as investors focus more on what they want the risks to be, rather than basing decisions on the reality of a situation.

The Titanic's compartmentalized hull structure was designed for the ship to survive a breaching of up to four compartments. It was a mathematical certainty that a breach of six compartments would send the ship to the ocean's depths. Interestingly, insurance companies, whose job it is to assess risk, actually charged less to insure freight on the Titanic due to their perception of its unsinkability.

Due to the rush to get the ship underway, the binoculars for the lookouts were misplaced. Therefore, on that fateful night in April, the lookouts were protecting this tremendously expensive ship, in the dark, with the naked eye. It is still hard to believe that the very expensive investment that was the Titanic could be taken down because of the lack of a $100 pair of binoculars.

After the tragedy, a board was convened to institute maritime procedures that would prevent such a disaster from ever happening again (which was convened not so much to preserve future lives, as to protect the future of the shipping industry). All of the recommendations involved existing technologies that were relatively inexpensive such as mandating that lifeboats be available for all passengers (the Titanic only had lifeboats for two-thirds of its passengers. The board also recommended that all ships be outfitted with multiple searchlights as well as using a radio frequency allocated specifically for ships.

As the Titanic proved, overconfidence can be deadly in any endeavor. That is why the market is known as the great humiliator. It will extract the greatest pain from the greatest number of investors when they least expect it. In a sense, the history of market crashes is the history of overconfidence. Each generation ignores this lesson at its peril.

Commentator Anthony Ogorek is principal of Ogorek Wealth Management in Williamsville.