In today’s world, where crowds move under the influence of personal greed and sentiment, going with the flow may not yield best fruits. Crowds also get things wrong. Some, obviously pundits, know how to adapt when things go rancid whereas others do not. They just follow. As numbers ghastly increase with each person wrestling to have a part in the treasure, the higher the chances of breaking it.
In stocks, there is a similar thing. Just one form of news or a word from a guru sends crowds in one direction or the other. This is called herding. Some news is good and works. But, at times, its inconsequential news that displaces investors from good positions. Where to? To where crowds are going. But, where they are going as a flux, the first may have some good pieces and the rest could have bones. Choosing to go in the direction of crowds at great speeds, do these people ever think of stampedes? I mean treading on one another. I have adopted the term stampede to reflect the result of this suicide splurge.
Do you know stock overheating? Precisely my point. Stock prices can not rise forever in disproportion to the underlying business performance. That’s the gist of this statement. Well, some herders are experts but others, a good number, in my view which holds out for many, are blind followers. So they rush to throw away their money and wait to see the disaster of their frenzy. Crazy! I mean no scorn for long term Investors who, for such irrationality, reap low returns but to those with less patience, no doubt, this is nonsense, a self inflicted robbery.
Charles Mackay came up with a very good description of herding in his book called Extraordinary Popular Delusions and the Madness of Crowds. He said we find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.
My interpretation of this is that these crowds operate like pendulums. They do not rest, always excited and are caught up in flip flops. Where they go, demand and prices rise abruptly. As a small Player, you can’t beat their leaders at speed and that means reaping less and in some cases, nothing, not even getting back your full principal. The leaders I am talking about are Pensions, Mutual Funds, Insurance Companies etc. But even some of those underperform sometimes. Herding has teeth and can munch anybody.
Bear in mind, when you go to the stock exchange that there are people who don’t invest in companies. They just bet. These are speculators. Heck, they bet that there will be more fools joining them at a late hour with no intention to stay long and your roving without doing any comprehensive study of stocks becomes a clincher. It makes them earn.
The market is not foolproof. Hence, they just run faster than you and punish all armatures. You buy overpriced stocks and get little or nothing in the short run as you speculate. If you want to have good perks, be a contrarian. Go where their eyes are not concentrating or where there may be a little but temporal dent that causes some Investors to stay away.
It is true that the commonest way of learning things is by imitating those who have succeeded at those things. But come to think of it. Not all the things your role model has done or is doing are correct or will play a critical role in bringing positive returns to their life, be them very nifty, witty pundits or any sort that has privileges of possessing less ignorance. Every human and his tools are prone to error, at least one error once in a while.
Remember the 80/20 rule. Pareto came up with it and I think it also applies here. Even machines have glitches. Human choices and vibes, to some extent, are shaped by inner emotions and many a bias, giving room to error. People talk good about the Companies where their money is, even if these firms are bleeding internally or are closer to overheating. Give me the strongest man who has defeated great Kingdoms or the most talented investor, they will all confess that there is one thing or the other they should have done better.
The lesson here is don’t copy everything. Copy some working principals and leave what you don’t understand. Even the successful mention the word oversight once in a while. Are you surprised? No, don’t be. The very best have seasons, good and bad seasons. They also hit some hard patches due to one decision or other.
How frequent their method works is what matters. That gives you a clue to say using their method may yield good results. Also, the level of profits should match the risk. I find the idea of using fundamental analysis of stocks very attractive. I also find scouting more profitable than running after the famous stocks when all eyes are on them.
If the spotlight gets off the famous stocks due to a simple issue and their herds subside with a resultant fall in share price, I calculate my intrinsic value and put my foot there. Cheap stock of great Companies with huge competitive advantages or unveiled Companies with long term growth are what Investors from the school of Warren Buffet, Lee Chin or Peter Lynch believe in.
Broad is the way that leads to destruction and narrow is the path that takes pilgrims to durable opportunities. If something is so easy and has high profits, know that it will attract alot of people and the profits will be reduced. Analysts do not give clues only to a few people but give the same advice to alot of people.
So if you are lazy or lack enough wisdom, any advice will send you sprinting. After watching one program on Bloomberg or CNBC, you will jump off and go to invest in Apple, Amazon, EBay, Microsoft, Tesla, Disney and Priceline in USA but lose your money on one of these because of not checking whether a stock is very expensive or cheap and/or arriving late. Bull markets have alot of stampedes for Armatures who are speculating.
Let us say you buy Apple on 4th August, 2015 when it is trading $113 because a very small number of Investors have walked out probably due to underperformance on watch sales and other temporal factors, you would be making a wise decision since that is way below its intrinsic value. It’s very cheap now for petty reasons. But if you buy Apple on the day it will be trading around the two hundred and twenties, your probability of getting large gains will shrink since its intrinsic value lies within the two hundred and twenties.
With this approach, you can get another one of these on the day it will be very cheap. Then go to the areas which are not applauded, with stocks that the market has given no acclaim but they consistently yield good results with good growth prospects. Here pick the other six stocks to make it 8.
When people are panicking concerning the rumoured increase in interest rates, you may choose to go against the tide. It is the right time to buy. Just wait a bit for the price to fall to a figure that is low enough to enable you buy at a cheaper price and hold for a for 6 to 7years. It cuts both ways but winners opt for the positive resilient side of such stocks in the long run.
You know what. Believe you me, wisdom is not common but foolishness is in abundance and there are no upfront fees for foolishness but a charge comes after a messy. Before you follow people who are buying earlier than you and send an invitation when the stocks are overpriced, why not consider this. If you are sage, don’t panic. Do your research. Don’t be over-dependent.
Fashion is for models, majority opinion is for politicians, diagnosis and unearthing of future blue chips is a duty of all Investors. There is no prize for conformity. Neither can your poor performance be justified by the dismal performance of a group if the economy is healthy. You are on your own. It beats me that some people feel that missing a quality stock in one place while facing one direction is the end of life without turning around to see how many stocks are doing well behind.
Companies are born every day. Companies with good ideas take time to be noticed by the broad market. It is during this time that some wise Investors begin to eye their stocks. As they are about to heat prominence, they jump in. This is not very hard. Have wide open eyes. Just work hard. Keep on calculating the fundamentals for different Businesses as long as you understand their core business and they are on the Stock market.
The point is never stop researching. The other clue is that Companies which might have come off the spotlight may rebound with one idea or the other. Savvy Investors go round searching for these ideas. Once they find an idea in a Business they understand, a stock under disdain, they do more research about it as if it is already their Stock. For this reason, a very successful Investor must have a Business Mind. These are some of the secrets of very successful Investors.