Cataracts

Cataracts, in the investment world, is a term popularized by Warren Buffett to describe a dangerous cognitive blind spot. It refers to the tendency of investors to get so fixated on a company's past performance—its historical growth, earnings, and stock price chart—that they become blind to its current business reality and future prospects. Just as medical cataracts cloud a person's vision, these investment “cataracts” cloud an investor's judgment, causing them to drive their portfolio by looking exclusively in the rearview mirror. They might see a beautiful, smooth road behind them (a decade of stellar returns) while ignoring the cliff edge right in front of them (a new competitor, a disruptive technology, or a change in consumer behavior). This focus on what was rather than what is and what will be is a classic mistake that can lead to disastrous investment outcomes, as the market ultimately prices businesses based on their future, not their past.

It's human nature to look for patterns, and a company's history provides a comforting and seemingly reliable set of data points. This psychological pull is so strong that it often leads investors straight into the “cataracts” trap. This isn't just a simple mistake; it's often rooted in powerful cognitive biases.

• Recency Bias: We give more weight to recent events. If a stock has gone up for five straight years, our brain starts to believe that's its natural state, forgetting that market and business cycles are inevitable.
• Anchoring Bias: We get “anchored” to a past piece of information, like a company's peak stock price or its “glory days” earnings. We might think, “It was once worth $200 a share, so it's a bargain at $50,” without asking why it's now trading at $50. The reason is often a fundamental deterioration in the business.
• Narrative Fallacy: We love a good story. A company with a compelling history, like a plucky startup that conquered an industry, makes for a great narrative. We fall in love with the story and fail to notice when the plot has changed and a new, less heroic chapter is beginning.

For a value investing practitioner, succumbing to cataracts is a cardinal sin. The entire philosophy is built on a forward-looking assessment of a business.

The core of value investing is to calculate a company's intrinsic value, which is the estimated value of all the cash it can generate for its owners over its remaining life, discounted back to today's money (a concept known as present value). Notice the key word here: future. Historical earnings are useful only to the extent that they help you forecast that future. If the business's competitive landscape has changed, its past performance becomes a dangerously misleading guide.

A key part of this forward-looking analysis is assessing a company's economic moat—its sustainable competitive advantage. An investor with clear vision asks:

• Is the moat getting wider or narrower?
• Are competitors successfully chipping away at its castle walls?
• Is technology making the moat irrelevant?

Think of companies like Kodak or Blockbuster. They had glorious pasts and seemingly impenetrable moats based on brand, scale, and distribution. Investors with cataracts kept buying them, fondly remembering their history, while completely missing the digital revolution that was rendering their entire business model obsolete.

Developing clear investment vision requires discipline and a healthy dose of skepticism. Here are some practical ways to protect yourself from this common pitfall.

Stop looking at the squiggly lines on the stock chart and start thinking like a business owner. Read the company's annual reports, especially the “Risk Factors” section. Listen to earnings calls and pay attention to the questions analysts ask. Ask yourself: “Forgetting the stock price, would I want to own this entire business today, given its challenges and opportunities for the next 10 years?”

This is a powerful mental exercise. Imagine it's a year from now and your investment has failed miserably. Now, write down all the reasons why.

• “A new competitor from overseas launched a better product at half the price.”
• “The company's key patent expired, and generics flooded the market.”
• “Consumer tastes shifted, and our product is no longer cool.”

This exercise forces you to confront potential future risks that historical data will never show you.

This is a famous mental model from Buffett's partner, Charlie Munger. Instead of just looking for evidence confirming your thesis (“Why will this company do well?”), actively seek out reasons why it might fail (“What could kill this business?”). Play the devil's advocate with your own best ideas. This helps break the confirmation bias that often accompanies looking at a rosy past. By focusing on the road ahead instead of the rearview mirror, you can avoid the cataracts that blind so many investors and give yourself a much better chance of reaching your financial destination safely.