Investing - should you listen to others?


My idea of a group decision is to look in the mirror.
                                                             - Warren Buffett


The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.
                                                             - Leo Tolstoy

What should you make of the above, seemingly contradictory observations from two great minds?

In the context of investing, should you listen to others or not? Well, my suggestion in this case would be to keep an open mind as much as possible. Try to understand, analyze and interpret the reasons for any (your) investment. The others need not be, but you should be extremely clear about why you are making any particular investment. If you are clear about this, it makes good sense to listen and understand the viewpoints of others also. The intent of listening should be to explore or question your rationale and come to rational assumptions/criteria. By open mind, I also mean you should have the strength of your own conviction. You should develop the specific capability to keep out the noise. Sometimes, in "sound reasons", there is only sound and no reason.

For strengthening your "rational behaviour", I suggest you use the "5 Why Technique" - keep asking yourself "Why" in a series of continuous questions to the most granular level. I personally believe that, if sincerely and correctly used, this tool can solve almost any problem - personal or financial. That is, if there is a solution.

Ask yourself or others - why should buy these shares? Because I will get good returns? Why will I get good returns? Because it is a popular company and everybody is buying it! Why will it give good returns if it is popular or if everybody is buying it? It is popular because it is making good profits. Now, let us take a look at the profits. See if there is an increasing trend etc etc. This approach will bring you to a position where you will be able to write down the reasons for any purchase or sale - this reduces the likely impact of your emotions on investing. Also, looking at the reasons in black and white (on a paper) makes you question the validity of your assumptions.

The Father of Value Investing, Benjamin Graham, summed this up beautifully in the last lines of The Intelligent Investor - You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Listen to others but make your own decisions.

Invictus.

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