Takeaways from Invisible Influence
I recently finished the book, Invisible Influence: The Hidden Forces that Shape Behavior written by Jonah Berger. It is an amazing book on the social influence on our behaviour that we are not aware of. A few chapters in the book are about people following others and being different from others unconsciously. Although Jonah does not cover anything about investors’ behaviour in the stock market, it reminds me a lot of my personal experience in investing.
Being the Same: Not much of a Value Investor’s Problem
I learnt from the book that humans are very likely to follow others when facing uncertainty and peer pressure. Besides, humans tend to favour the people and objects around themselves simply because of familiarity.
The stock market is full of uncertainty and investors are prone to herding simply because they face uncertainty. I am sure a lot of value investors are aware of how damaging herding can be. We learnt about Mr. Market and that the stock market is a voting machine in the short run in value investing. Being a contrarian is part of the job of a value investor because Mr. Market is often wrong.
Being Different: Is it Original Value Investing or Value Investing?
In my experience in learning value investing, I recalled a couple of times that I was too keen to have an original idea. In Aug 2015, a friend of mine told me about the idea of buying Tencent (700 HK) and it was trading at HKD 140 after the market crash in Hong Kong. I was not interested and did not act on it. I did not even read its annual report to understand its business and judge if it was a good buying opportunity because I wanted to have an original idea that was a hidden gem. Tencent’s last price is now HKD397.4. What a big miss!
While I attributed this to my narrow coverage of stocks back then, I have one more explanation after reading Jonah’s book. A person is unconsciously inclined to be different from his peers when it comes to something that links to his identity. For example, a younger sibling is very likely to have a different strength from his older sibling. When an older sister is good at music, the younger sister is more like to be good at something else such as basketball because having a different strength gives the younger sister her own identity. All these happen unconsciously. The younger sister is going to attribute her strength in basketball to her interest and hard work on it but not the different identity.
Stock ideas are linked to a stock picker’s identity. Having a good original idea on a hidden gem proves one’s stock picking ability and it rewards one’s ego. However, value investing is about investing in good/undervalued companies (and making money from it). It is all about the value of the company and has nothing to do with the originality of the idea. We are unfortunately easy to insist having an original idea unconsciously. This definitely limits one’s scope of potential investments and the opportunity cost can be very high.
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