First rule: Don’t follow the crowd: John Templeton developed a knack for looking at investments in a different way to other investors, whether in a different country, with a different time horizon, using a different valuation method, or with a different level of optimism or pessimism.
He would say that share picking is the only activity where you do not follow the advice of experts. If you had a medical problem and asked the advice of 10 doctors and they all agreed, you’d probably follow their advice. But if 10 professional share analysts say that this share is a good buy then you should not buy it.
Anything great about the company is already in the share price. It is often wiser to do the opposite of what the experts say.
Finding that others disagree with your buy and sell decisions is something that goes with the territory for a bargain hunter. If the consensus was favorable it would not be a bargain. Bargain hunters are independent-minded and have faith in their own judgment.
Humans seem to be hard-wired to overreact to a situation and this is linked to an strong impulse to respond to the actions of the other buyers and sellers rather than apply sound reasoning.
Take advantage of people with less clear thinking, who are dumping stock or hyping stock on the basis of emotion.
This easy to say, difficult to practice:
‘Of course, you may say, buy low, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high a lot of investors are buying. Prices are low when demand is low, investors have pulled back, people are discouraged and pessimistic. When almost everyone is pessimistic at the same time, the entire market collapses…investors are on the sidelines, sitting on their wallets. Yes, they tell you: ‘Buy low, sell high’, but all too many of them bought high and sold low. And when do they buy? The usual answer: ‘Why, after analysts agree on a favorable outlook.’ This is foolish, but it is human nature.’ (John Templeton)
How to think independently
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