THIS ARTICLE WAS WRITTEN BY TEE LENG AND FIRST PUBLISHED ON VALUEEDGE
How should our thinking approach be like with regards to investing? With this I hope to share my thinking on how one should form an approach to investing.
Reading various forums, news sites, bloggers etc. one thing I realise is that individuals prefers the stocks that are either common or enjoys a large consensus. While I am not saying that the majority is wrong, as to be able to convince the large majority that something is worth investing, more often than not there is some truth in it. However, if we truly want to beat the market returns, which is determined by the investments of the majority, how does one do so by taking the consensus approach?
Individuals should take the path less travelled, a more contrarian and in some way “lonely” approach with regards to investing. It is this vast difference in standpoint that makes one uncomfortable when facing the majority consensus are they rewarded with market-beating returns. Of course, I am not advocating that one takes a different standpoint for the sake of taking a different standpoint. But rather, it is being able to identify why and when the market consensus is wrong. This is why investing is simple but not easy, as said by Charlie Munger. The idea of taking a contrarian approach, being fearful when the market is greedy but greedy when the market is fearful are all very simple concepts. However, they are not easily implemented. It is not within our nature as humans to embrace pain – the discomfort of going against market consensus.
Following this, I guess many would question how can one not only take a non-consensus approach and not fall into the trap that they are not differentiating themselves for the sake of differentiation.
Ask yourself, “who doesn’t know that already?” With each idea you have, you have to ask yourself the question. If one is unable to convince oneself that market has not yet priced in the information, then essentially you are not taking a non-consensus approach. This is called second-level thinking as Howard Mark phrases it.
First-level thinking says, “I like this product that Company ABC produces, let’s buy the company’s shares.”
Second-level Thinking says, “While this is a good company, everyone too recognises this fact. Hence, the stock is overrated/overpriced and not worth buying.”
However, the thing with second-level thinking is that it is not easy, which leads me to my next point.
Surround yourself with like-minded individuals. With every stock bounce the ideas off each other and through this it helps create such second-level thinking through discussions or arguments over why the stock should be bought. The reason I say like-minded individuals is solely because if two individuals promotes a different investment strategy say Technical versus Fundamental, such a discussion would not yield any results or conclusion.
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All views and opinions articulated in the article were expressed in Tee Leng’s personal capacity and do not in any way represent those of his employer and other related entities. Tee Leng does not own any shares in the companies mentioned above.