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Lawrence A. Cunningham’s Quality Investing: Elon Musk is hitting ‘peak hubris’ with his high-risk Twitter and bitcoin plays. Tesla shareholders should be concerned.

Elon Musk is certainly self-confident, perhaps overconfident, but what about his hubris?

Confidence and hubris reside at opposite ends of self-image, with overconfidence in between. Confidence is essential in life and overconfidence can be good or bad in business and investing. Hubris precipitates peril. 

Hubris — arrogance or excessive pride — may befall any of us, but Musk may be nearing the peak. Hubris tends to strike spectacularly successful people on a roll of success, and is characterized by narcissism and dismissiveness that leads to excessive risk-taking.  

Musk is uber-successful, beyond most anyone’s wildest dreams. He built Tesla
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+5.78%
,
SpaceX and other valuable companies. Currently he is the world’s richest person by a huge margin.

Narcissism refers to those with grandiose self-images and cravings for public regard.  Musk clearly relishes the limelight, evident from his prolific and provocative tweeting, promiscuous behavior, and his turn hosting “Saturday Night Live.”

Dismissiveness is exhibited by ignoring the opinions of advisers and experts. Musk’s social-media ravings do not reflect the expected advice of either his boards of directors or professional advisers. Indeed, while Musk is in the news almost daily, one almost never hears about his boards or other advisers.

Musk is a natural risk-taker, having started many speculative businesses. But his recent bid for Twitter
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at a premium and unilateral attempt to repudiate the deal are risks of a higher order of magnitude. Ditto his foray into bitcoin
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+2.15%

trading, which is also highly volatile.  

Countering hubris are other character traits that are worth probing. One is humility, the recognition of the limits of one’s knowledge.  It is an awareness of fallibility, opposite of the know-it-all. Alas, humility does not appear to be among Musk’s strong suits.

Inquisitiveness can be a direct defense against excessively risky bets that hubris produces. It combines intellectual curiosity with thorough fact-finding. It tests assertions and hypotheses before accepting and acting on them, rejecting assumptions that are not based on evidence.  Again, this is not something Musk radiates.

It is possible to reverse hubris, to keep one’s confidence but check the arrogance.  Do this by striving for humility, not believing praise you hear about yourself, and getting advice from people with different points of view. It is not obvious that Musk is up for cultivating these habits either.

Heeding history and reading literature can help. Those who think they are the smartest people in the room rarely are. Look no further than Nick Leeson of Barings Bank in 1995 or Joe Cassano of AIG in 2008, whose hubris-backed but unhedged bets destroyed their firms.  

In literature, “Frankenstein” is the ultimate hubristic disaster, while “Pride and Prejudice” shows hubris can be tamed, as a humbled Mr. Darcy at last won Elizabeth, the woman of his dreams.

Detecting hubris is difficult, other than in hindsight. The empirical research suggests two things to watch for: more and larger acquisitions (producing more volatile results), and more attempts at earnings management (accompanied by eroding performance). With Musk, while most would prefer to see humble confidence come through and win out, the smart money is on a hubristic fall.

Lawrence A. Cunningham is a public company director and founder of Quality Shareholders Group, a boutique that facilitates relationships between long-term, concentrated shareholders and the companies that would like to attract them. He is the author of many books, including “The Essays of Warren Buffett: Lessons for Corporate America.” 

More: I’m a Silicon Valley M&A pro, and my advice to Elon Musk is to stop his courtroom gameplaying over Twitter

Also read: Success breeds excess: Make sure you own stock in companies where employees are competitive, not complacent

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