Variant Perception and Second Order Thinking
If you focus on the price, you're assuming that the market knows more than you do. That may be the truth, but in that case you shouldn't own it. The stock market is there to serve you, not to instruct you.
You only have to be right a few times in your lifetime, as long as you don't make any big mistakes.
Warren Buffett
In investing or business, one usually assumes that the market perception regarding the valuation of any stock is fairly accurate and it is tough to beat the market returns for an amateur investor.
However, time and again, brilliant investors have been generate incremental returns over the market and have done so over long periods of time. (for example, Berkshire Hathaway has returned a mind boggling 2,744,062% v/s 19,784% for S&P 500 from 1964-2019 )
So what makes the great investor special ? What does he/she need to have in order to achieve success in the stock market? While in the last post we looked at patient capital and its advantage of an individual investor, this time, we look at another factor - variant perception & second order thinking .
Variant perception is related to a viewpoint which is different from the consensus view prevailing at that point in time. What about Second order thinking ? It's thinking beyond the obvious - deep understanding coupled with the intricate insights . Let's hear from one of the greatest investors himself-
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.
Howard Marks, The Most Important thing
So how does one develop this so called variant perception/second level thinking? Like any learning curve for skill development, this muscle in your brain needs to be built over time. One needs to have one's own thesis for a particular investment and not be swayed by the general mood of the market and current fad. Time and again, investors have burnt their money (and time) in the pursuit of the next big thing.
To succeed in investing , one needs to have Courage , Conviction & Cash, and usually one of them is lacking every time
Anonymous
Some thoughts on building one's variant perception while evaluating an investment:
First Hand Research
Doing one's own research and building a thesis is critical if one has to weather the volatility in the stock market. Its very easy to get swayed by the hot picks and investing styles of famous investors , but its important to have one's conviction in place when one chooses to do so. For example , in my own investing journey, in 2017 ,I got interested in investing in a leading gold loan financing company - Manappuram Finance by reading the articles by Dr Vijay Malik (In case you are remotely interested in learning fundamental analysis for any company, please , please read his approach and analysis - it will save you a ton of your money!) . Based on my initial research and and understanding , I started buying the stock at 110-120/- levels in 2017. When the ILFS crisis struck, and the stock price fell down to nearly 70/- , I loaded up more because of my conviction that it was a temporary mispricing of the company despite all the obvious contrarian signals - promoter buying , microfinance subsidiary turning a profit etc.
You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains
Steve Jobs
Time Horizon
Another aspect which can serve as an edge to an investor is thinking about the long term future of a business and his/her investment horizon. A stock is not just a real time price ticker - its a piece of ownership of a real Business. If you had your own business and were convinced about the long term profitability of the same, would you sell and buy it repeatedly depending on how the market situation was at that time? If an 100% owner who is convinced wouldn't trade his/her shares on the whims of the market, why should we, a part owner not think along the same lines?
I Believe That Market Prices Are Always Wrong In The Sense That They Present A Biased View Of The Future
George Soros
Well , despite one's understanding , sometimes Mr Market behaves in strange ways - it fails to recognize what you know about the business and not behave accordingly. Or there is another situation as per the efficient market theory - all the information is already priced in and you are the one who is wrong!
So, my dear Reader, what will you do? Be patient or jump ship? But always remember the quote below:
In the short run, the market is a voting machine but in the long run, it is a weighing machine
Benjamin Graham, author of the Intelligent Investor
DISCLAIMER
I am not a SEBI registered Investment Advisor
The stocks mentioned in the post are for educational purpose only and are not recommendations; please consult a financial advisor for evaluating investments
All the posts on this blog are for educational and discussion purposes only.
I am currently invested in Manappuram Finance