We recently came across a Bloomberg article entitled “Best Stocks Liked Least by Analysts Who Missed U.S. Rebound” and it captured the essence of our investment philosophy. The article concludes that the stocks that Wall Street analysts liked least were the ones that did best in this recent economic rebound. Those are the same stocks that were heavily dependent on the economy, and the analyst community felt the economy would remain weak, hence the low stock ratings for cyclical companies. Of course, when the unexpected happened (the economic rebound) they were all proven wrong.
This phenomenon reveals a lot about the psychology of the marketplace and business in general. It seems that no matter how sophisticated our analyses become, humans always remain prone to group thinking. The sharpest minds in finance got it all wrong because they were caught up with current events and extrapolated the present into the future. It was short-sighted. Some publicly-traded businesses were being priced as if bankruptcy was around the corner, even though many had the financial capacity to survive the storm. Value did not seem to matter as much as sentiment on the street (you might also call it panic!).
Independent thinkers are the best investors. They see the big picture and think long-term. They know that they’ll never perfectly time the market, and what matters is what price you pay for what you get. For this reason Warren Buffett, who has one of history’s best investment track records, keeps his head office in Omaha, Nebraska instead of in New York City. He likes to remove himself from the noise.
The characteristics of good public stock investors also carry over into everyday business practice. Whether you’re thinking of spending marketing dollars, building out a new location, buying out a competitor, purchasing inventory or hiring more people, it is that same independent thinking that will allow you to beat your competitors in the long-run. At Merchant Advance Capital we believe in focusing on the long-term. If you get caught up with what everyone else is doing you may end up hurting yourself. You might be better off locking yourself in a room and fleshing out the costs and benefits of a business decision rather than listening to the herd outside!