What makes value investing and contrarian investing difficult is the fact that we are social animals and want to hear what we think. We love to be a part of a crowd – and preferably be an important part of the crowd. This makes being a contrarian difficult, and it may be rewarding – however it could take a long time. Look at Franklin India Blue chip – they do not have Reliance, but they have Bharti Airtel. This is very different from other portfolios. I am not saying either way what is right, but yes it is difficult to be different.
Imagine, if NaMo comes to power and decides that PSU companies will be dramatically strengthened and SBI PE doubles, and the PE of Hdfc bank comes down. Obviously the index will beat all the “top” large cap funds at least till the Fund Managers react. Personally I don’t have a PSU oriented portfolio, so my portfolio too would under-perform. I am fine, I don’t have to report to anybody!
We love approval – FROM ANYBODY – so an author is looking for a good review, an investor is looking for signals from the market buying the shares in his portfolio. Even when we like say Rahul Dravid, we like to align ourselves with people who like RD. We get into arguments about how RD is better than say, Ricky Ponting. We LOVE CONFIRMATION BIAS. It is very satisfying to our brain – like the consumption of sugar. So when we buy a share we want the whole world to buy the share, and when we sell a share we want the world to sell it too. SO WE TRACK THE PRICE OF THE SHARE WE JUST SOLD!! In other words we love being with the crowd (remember social animal?) and will do everything to get crowd approval. Hence our dislike (or disapproval for the minority). This could also explain why ‘market sentiment’ (mostly for traders) can change so quickly. We can go in the morning to our brokers place thinking we are going to sell, but end up buying some shares instead of selling it.
If you choose a share that some other fund manager has choosen (and you found out after you bought it) your mind triggers off a lot of chemicals – exactly like sex or sugar! We seek approval so much! When I see research reports, i don’t see the conclusion. I first take in just the facts…so that you are not influenced by the byline! Knowing what a smart person does is DANGEROUS – it takes away your ability to think. Be careful. Your brain is normally an enemy of your investing (not original, there is a book on that). I am wondering whether this is what influences us to like people belonging to our community, school, college, background, club,…etc.? Market is a voting machine – didn’t Graham say that long long ago? Voting goes by majority. So the US President is Trump and the Indian PM is Namo. Whom you voted for does not matter. Will we admit that we voted for the losing candidate? Approval seeking aka Herding.
So there are 2 things that you can do while buying shares. Either buy at the bottom when everybody is trampling it – SBI and Icici about 6 months ago (very difficult). Or you buy when many others have started buying – you know how HERDING is going to happen. However if you buy when people are bored…you might have a very long waiting. If you buy at the end of the Herd buying, you will fail too…be careful.
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